All your hard work finally paid off, and you’re now earning more. Maybe you earned a promotion that came with a raise, started a job with a higher salary, or your side hustle has finally turned profitable. Even if you haven’t heard The Notorious B.I.G’s famous song, “Mo' Money, Mo Problems,” you know that life won’t be the same.
Increasing your income can be a blessing or a curse depending on how you react when it happens. It can set you on a path to financial independence or lead to more instability. And you will start blaming the extra income for your self-inflicted money problems when the latter happens. But should you blame the money or yourself?
As you get older, find stability in your career, invest, and diversify your income streams, you will start earning more money. You should take steps that will protect your money and increase it. And it all starts by keeping the money problems at bay.
This article will discuss seven steps you can take to avoid money problems when you start making more money and how each can benefit you in the long term.
Lifestyle inflation happens when your expenses increase to match any increase in your income. It is the number one cause of money problems. It usually creeps in slowly, and you don’t notice in most cases. Until one day, you realise that you are still struggling to save money, living paycheck to paycheck, or even in debt despite doubling or tripling your income.
Lifestyle inflation will usually sneak into your finances disguised as a self-reward. It starts with simple things like buying yourself the latest electronics, going on vacation every quarter, or moving to a nicer, more expensive house every two years. Before you know it, these practices will metamorphose into hard-to-maintain financially draining habits.
The best way to avoid lifestyle inflation is to learn how to delay gratification. If, for instance, you have doubled your income after changing jobs, instead of buying a top-of-the-range fuel-guzzling car or moving to a posh estate, save the extra money for a house downpayment and maintain your current lifestyle.
By thinking long-term, you can save for the future, live below your means, and build financial security for yourself and your dependents.
Giving your money a purpose means using it in a way that aligns with your financial goals to make it last. Everyone has a unique financial situation. To give your money a purpose, you should first review your finances and determine where to improve. Now that you are making more money, what financial loopholes do you need to close?
Depending on your situation, there are multiple ways to give your money a purpose and not waste it. They include:
Pay down debt: Do you have a debt obligation slowing you down or straining your budget? The first thing you need to do when you start making more money is using the extra amount to service your debt. If you have a mortgage, this will help you build equity, and if you have a car loan, you will lower your debt-to-income ratio.
Save & Invest: This is the time to consider your long-term financial goals, like buying a house, saving for your child’s college tuition, and planning for retirement. These hard-to-accomplish goals will require you to start saving and investing early. Give your money the best purpose by directing them to your long-term goals so that you can guarantee your financial independence and security.
Donate: You can use your money to support organisations or people you care about. While this will likely bring no financial gains, your philanthropic work will touch lives. Additionally, acts like Educating a distant family member or building a class at your primary school can leave a long-lasting legacy for you.
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One of the biggest mistakes people make when they start making more money is showing off by living beyond their means and keeping up with the Joneses. This practice encourages bad spending habits that can cause you money troubles. They are unproductive and unhealthy and can ultimately lead to your downfall.
It's important to focus on personal growth, happiness, and well-being, rather than trying to prove anything to others when you increase your income. Remember why you worked hard to achieve success? You did it for yourself. Therefore, instead of showing off, reflect on your accomplishment and the efforts that went into achieving them.
There are positive things you can do to celebrate your accomplishments without being a nuisance. You can share your success with your loved ones in authentic and genuine ways. You can give back to the community without expecting anything in return. And most importantly, you can focus on aiming higher.
Set new goals for yourself and start working towards them, whether related to your career, personal development, or other areas of your life. You won’t have the energy and time to show off when you are occupied with your next challenge.
The more money you make, the more responsibilities you will assume. Family members and long-lost friends will start reestablishing ties, and the community will consider you a valuable member. When a loved one needs to be bailed out, they will call you, and every time there is a Harambee in your village, they will contact you to donate.
As much as you would love to be supportive, you won’t be able to help all of them. And if you try to, it might backfire on you. You won’t have any money left to save or invest to achieve personal goals or live the fulfilling life you want. It might sound selfish, but you must prioritise yourself before helping others.
And how do you do that? By creating money boundaries. Whether paying black tax or supporting your community, you must communicate how much help you can offer by managing expectations, learning to say no, and being ready to deal with all types of pushback. Such practices will ensure that you help your loved ones without putting your finances at risk.
Increasing your income can have significant effects on your finances. These effects can be positive or negative. It will all depend on how well you approach your new situation. If you don’t know what steps to take next or have self-doubts, you should hire a financial expert to hold your hand through it.
A financial advisor will help you in many ways, from helping you learn how to budget and live within your means to building investment strategies and planning for retirement. Financial experts will help you make the right financial decisions, ensuring you avoid losses and get the best out of your money.
When hiring a financial advisor, you must do your homework. You should choose one that is reputable, has a solid track record, and is licenced and registered with the Institute of Certified Investment and Financial Analysts (ICIFA). This will lower your chances of being defrauded by scammers masquerading as advisors.
Read Also: Why You Might Need a Financial Advisor
When you increase your earnings, your debt-to-income ratio drops. You became attractive to money lenders as your ability to repay loans is better. You can become a target over time. Lenders like your bank will start tempting you with good terms and low interest to prompt you to take loans. And family and friends will start begging you to help you co-sign a loan.
Let’s look at the case of Becky, a 32-year-old interior designer. Five months ago, Becky was promoted to a management position that came with a 65% salary increment. Within two months, Becky had gotten herself a car on a hire purchase terms. She was to pay Ksh30,000 per month for two years.
But everything went south last month when a competitor acquired Becky’s company. Half of Becky’s colleagues were fired, and the remaining half, including Becky, were demoted and salaries reduced. Suddenly Becky couldn’t afford the debt repayment and was at risk of defaulting. She had to return the car and negotiate with her debtor to resale it. She ended up losing over Ksh200k.
How can you avoid Becky’s problem?
The first thing is you need to be patient. Second, you should avoid consumer loans. If you are going to go into debt, use the loan amount to invest or start a business that will help you generate income. This will ensure that even if your income is interrupted, you can generate money to repay your debt and avoid losses.
Before taking out a loan, always weigh the pros and the cons. Think about the cost of the loan and the risk of losing collateral, not just the benefits. If you decide to take out a loan, shop for the best terms and only borrow what you can comfortably afford to pay back, even when a crisis strikes.
The circle you keep can influence or hurt your finances. You must surround yourself with people who share your thoughts and ideas regarding money. These people have the same money personality as you and can hold you accountable, criticise you when you are in the wrong, and congratulate you when you win.
But what happens when you surround yourself with spenders and people with negative thoughts? People who believe you only live once and keep encouraging you to buy the latest designer clothes because you might die tomorrow? Only one thing will happen– they will prevent you from growing financially. Their negativity will pull you down, preventing you from achieving your goals.
When creating your circle, you should surround yourself with people who:
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As you increase your income, ensure that you constantly keep your financial plans in order. Setting new goals for yourself, thinking long-term, and protecting yourself in the process will help you build long-lasting wealth. You can stay grounded, and it helps you maintain the right money mindset.
To avoid most of the problems that more money brings, learn to be patient. Don’t rush to take a hasty decision or become overconfident. Before you take any step, weigh the pros and the cons and discuss it with your confidants. Sleeping on it or getting a second opinion might help you develop a new perspective.