Salary increase time is a great time. I am not talking about the mandatory annual inflationary increase, but those other performance or promotion based increases. While we probably always had an idea of what we would like to do if any additional income came our way, for some reason, after one month of increased earnings, we are sitting in exactly the same position – there is not enough.
I have mentioned before that you should consider the amount you save as a percentage of your income. When your salary increases, you will have additional tax expense. It is calculated as a percentage of our earnings, and while we might complain a little, we will generally accept that that particular expense increases with increased income (it is probably also helpful that our employer deducts the tax automatically and therefore we have no say in the matter). But what about our other expenses?
If 10% of your salary is spent on food, and you are managing with that, is there a need to proportionately increase the amount you spend on food? Not necessarily. If the rand amount increases by food inflation every year, then that quantum should be sufficient – that is, you need only increase food expenditure by food inflation, not by increased earnings. Therefore, technically, the more you earn, the lower the percentage of your earnings should be spent on food and other similar expenses.
But what about your savings and retirement planning? That is different. If you have decided you put away 10% of your income towards your retirement, then as you get an increase, that amount must increase proportionately, as a minimum. And the same applies to your savings. Remember that the income you will want to be earning in retirement will be relative to your final salary in the year before you retire. Therefore, an increase in salary, increases that final number and you need to try and keep up with it. Given the fewer number of years till retirement, with each salary increase, this might necessitate increasing the percentage above 10%. But that is only if you want to keep the same target replacement salary in retirement, a luxury that few can afford.
As I said, it is human nature and natural to want to increase our standard of living, but before we do that, let us look at our expenses and decide (1) which ones should proportionately increase when we get a salary increase and (2) which ones should just increase by its relevant inflation factor each year. Once you have done that, apply those principles when you get an increase. You will probably find there is a little bit left over. Great! You can now increase your standard of living if you want, well in the knowledge you have already taken care of the savings you needed to.
Please note that the author of this article is not a certified financial advisor in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Accountancy SA and the author cannot be held liable for any loss (including indirect and consequential loss) arising from your reliance on the opinions given in this article. Should you nevertheless elect to rely on this article, you do so at your own risk and agree to indemnify Accountancy SA and the author from any loss or damage that you may suffer as a result.
YOU AND YOUR SALARY INCREASE
What do you do with the additional income you receive when you get a salary increase? Does it seem like regardless of how much that increase is, you do not seem to be saving any more than you did in the past? While I am not ignoring the fact that food inflation is high and that life comes with unavoidable family expenses, there is also a little bit of human nature in there: we naturally incrementally increase our standard of living as our income increases. Unless we put clear savings and expenditure principles in place, we will always feel like there is not enough.
Author: Gizelle Willows CA(SA) MCom Finance is Senior Lecturer in Financial Reporting at the University of Cape Town