Controlling spending inflation

Growth in spending over time

On of the difficulties when trying to build savings is that there is always temptation to spend. This temptation gets worse once you have salary rises and bonuses.

What to do with your bonus

I have written previously as to how you should think about a bonus. Essentially it isn't something that should be relied upon ie for paying for annual holidays or to help pay off the credit card. Instead, 30% of your net bonus income should go into a pot for "treats" and the remainder directly into savings. Following these rules should help to prevent your reliance on your bonus for discressionary spending and help overall spending control.

Salary rises

Salary rises are a little different. People often assume that since they will obtain a salary rise in the future then they don't need to save at all today. Once they receive their salary rise then all of the excess income will go into savings. This thinking is a mistake for several reasons.

Firstly, you should always be saving no matter what your salary. It's a good habit to get in to, forming a habit that will help you to build wealth even quicker in the future once your salary rises. Furthermore, it states your intent to yourself - motivating you in your daily job. I've heard the act of saving regardless of income summed up in a useful phrase: pay yourself first.

Even if you earn a small amount you should be trying to save a portion of it. It might be tough but it will be psychologically beneficial to start to build a savings pot today. A person who earns £100 per week can save a couple of quid without dramatically altering their lifestyle.

The second reason as to why it is a bad idea to wait to start saving is the more important one. If you wait, then the likelihood is that you will never start to save.

As incomes rise, people tend to notice the excess income at the end of the month and then reward themselves with a gift at the end of the month. They normally justify the purchase by arguing that it's unusual for them to have excess cash at the end of the month.

Additionally, as a person earns more their tastes and consequently their purchases become more expensive. When once upon a time they would have made themselves lunch each day, they may justify the odd bought lunch reasoning that they can afford not to make lunch every day. Similarly, with new clothes, where once they might have bought at the discount store, now they start to shop for the better brands arguing that the quality will mean that they last longer. 

All of this surmounts to spending inflation. The end result is that little savings are ever built. As incomes rise so does spending. These are the same people who don't plan their savings. They simply "save" any excess cash at the end of the month. If this sounds like you then stop! You need to start to automate saving today. Don't wait to see what you can afford to save - the likely answer is £0....or so you tell yourself.

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