Adjusting Your Savings When Your Income Changes
During the course of your professional life, it’s inevitable that the size of your paycheck will change. Whether you move jobs, get promoted or get laid off, there are several factors that influence how much money you bring home. When your income does change, for better or worse, it is important to know how you can adapt.
Don’t spend more
If you get a raise or bonus, give yourself a pat on the back because you have earned it. Just don’t rush out to the mall to treat yourself right away. When you get a pay increase and immediately adjust your lifestyle to it, you become trapped in a cycle of getting paid more but still not having more money ready for the future. Take a look at the goals you want to reach before you alter how much you spend every day. For example, if you want to have money for a down payment on a house, consider saving your pay increase on every paycheck to bring you that much closer to being able to afford it.
Reinforce your emergency fund
When you’re living paycheck to paycheck, a raise is a good opportunity to build a financial safety net. You might be tempted to use your raise to eliminate debt, but you should build up an emergency fund first. This supply of cash should cover at least three months (but up to six months) of living expenses and should only be tapped into for true emergencies like car problems, health issues or job loss. While carrying debt isn’t ideal, preparing for an uncertain financial future is even more beneficial than eliminating a deficit that you are already on course to bring to zero.
Know where you can tighten the belt
Sometimes your employer runs into trouble and you receive a pay cut, but it’s not the end of the world. Cut out any unnecessary expenses you have before you opt to stop saving money. Though savings interest rates might not be the greatest, any money saved is an opportunity to gain a little bit more from your bank every month. Even if you’re only putting away a bit at a time, adding to what you have squirreled away in your emergency fund might make a big difference if there are more bumps in the road ahead. It might be sad to have to stop eating out or purchasing new clothes because of budgetary constraints, but it’ll make you happier and more secure in the future if you run into harder times.
Make it automatic
Whether you get a pay cut or a raise, making saving an automatic process is key to future financial stability. When your income shrinks, having part of your paycheck divert to your savings account is especially helpful because what you see on payday will be what you have to work after savings have already been set aside. Automatic savings is also a good idea since many Americans think budgeting is smart but not something that is done on a regular enough basis. Growing your savings account with little to no monthly effort on your part will make sure it gets done, but it’s also worth considering manually increasing the amount automatically taken out of your checks whenever you receive a pay raise.
One can only hope that all changes to their payrates are positives, but it’s not always in the cards. By having a plan for either scenario, you can ensure that changes to your income don’t drastically alter your financial security.