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Strategies to Save

3 Reasons You Earn More But Still Feel Broke

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3 Reasons to Earn More

If you’re earning more but still feel like you’re living paycheck to paycheck, there’s a likely culprit: lifestyle inflation. Lifestyle inflation is the ultimate budget-killer — a widespread phenomenon that occurs when people spend more as their income increases. Before they know it, that raise or bonus they earned slowly but surely disappears … right into that cell phone upgrade, a bigger apartment, or those few extra takeout orders each week.

Any financial planner can offer sound, reasonable methods for avoiding this problem: Stick to a budget. Automate your savings. Bump up your 401(k) contribution. The solutions seem easy enough, but no matter how much more you earn, you still feel like you’re living paycheck to paycheck.

We’ve come up with three simple reasons why you might still feel broke — even though you’re earning more — along with strategies on how to overcome them.

You don’t know what you want from life.

One reason many people struggle to keep their spending in check as their income increases is that they aren’t intentional about how they spend their money, says Meg Bartelt, founder and president of Flow Financial Planning. Bartelt encounters this problem every day with her clients, who are mostly women working in the tech industry who earn healthy paychecks but live in expensive cities.

When people are clear about their reasons for earning money and the goals they hope to achieve with those earnings, it becomes easier to avoid the kinds of incremental spending increases that can quickly consume their budget.

“Ask yourself why you worked hard for a raise,” says Bartelt. “Was it so that you could eat out more or buy fancier clothing or have a better streaming subscription … or was it so that you could make a meaningful change in your life?”

Goals — whether it’s being able to retire at 45 instead of 65, sending your child to college, or buying a home — give workers a reason to keep an eye on their spending from paycheck to paycheck.

To help figure out your financial goals, Bartelt suggests asking yourself a specific set of questions:

What do you want out of life?
What do you want to do, have, or accomplish?
How much money is it going to take to get you there?
And how are you going to get that money?

Taking this approach may also make the concept of budgeting more palatable. Saying “no” to a few upgrades in your life will feel less like deprivation, and more like a positive step toward the future you imagine for yourself.

You compare yourself to others.

Nothing can threaten a healthy budget like a serious case of “FOMO” — fear of missing out.

It can be hard to keep long-term, big-picture goals in mind amid the constant stream of filtered photos of international trips and nights out posted on social media. “It’s a huge contributor [to lifestyle inflation], especially for younger generations,” says Stephen Alred Jr., founder of Atlanta, Ga.-based financial planning firm Ignite Financial. Constant, real-time coverage of internet acquaintances’ adventures can make people feel worse about the state of their own lives and distract them from what they really want or need. Then, when a raise or a bonus comes into play, they are more likely to spend it on something that fits into that picture of what they think they should be doing, rather than what works best for their future goals.

It’s important to remember that you won’t get the full picture of someone’s life by looking at their social media profile — for example, you won’t know that the friend who took the tour of Italy last summer is still paying off the resulting credit card bill a year later, and you won’t see that a person only ordered appetizers at that fancy restaurant she went to last week, says Alred. Focusing on your own needs and goals, separate from those of the people in your life and in your social network, is critical to being happy with the state of your finances and your life, now and in the future.

You haven’t addressed negative spending patterns.

Once your financial goals begin to take shape, the hard part isn’t quite over. If you have a pattern of spending money as soon as it’s in hand, it’s going to take a while to change that behavior. Alred calls this a “behavioral barrier” — something people do every day with money that prevents them from reaching their financial goals.

It’s calling Uber every time you’re at the office later than 5 o’clock. It’s using your credit card to pay for even the smallest purchases. It’s grabbing a $15 salad for lunch every day.

These behaviors can crush financial goals, whether a person earns $30,000 or $300,000. Getting the right habits in place now will not only help combat lifestyle inflation this year — it will help down the road as income (hopefully) continues to grow.

Come up with strategies to help break those negative spending habits. For example, we’ve written about a simple $20 rule that can help break your credit card addiction.

But don’t be too tough on yourself. You shouldn’t deprive yourself of simple pleasures or pinch pennies to the point that you’re putting your mental or physical health at risk. Budget for the things that you know will bring you happiness, like the weekly dinner with friends you can’t miss or your daily $5 latte.

“Be clear about what’s important to you,” says Mary Beth Storjohann, financial planner and founder of Workable Wealth. “You can do it all, you just can’t do it all at once.” Once debts and savings goals are taken care of, “20% should go toward something fun,” says Storjohann. Building in some flexibility will help you avoid stress and self-loathing down the road — and will allow the occasional indulgence without throwing savings goals off track.

The bottom line:

Rigid financial rules may work for some, but will be hard to implement without a solid reason for following them.

“It’s like a diet. If you restrict your calories significantly, maybe you can last for a week or a month,” says Bartelt. “But most likely, you’ll revert to your old habits in the long run.”

 

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Strategies to Save

Is it Possible to Save too Much?

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Is it possible to save too much?

A recent survey from the Federal Reserve found that nearly half of Americans—including those who are, by other metrics, financially comfortable—would not be able to come up with $400 in an emergency. For many, putting aside extra money at the end of every month is near impossible, or at best a chore.

But there’s another (perhaps less common) group of people who get a thrill from watching the numbers in their savings accounts climb—and who will go to great lengths to make it happen. For these people, the act of saving is its own reward.

“It’s the person who will go to a certain gas station to save two cents on gas, but drive further than two cents’ worth of gas to get there,” explains Dr. Clifton Green, associate professor of finance at Emory University in Atlanta. “Getting those savings is a form of happiness for people, just like anything else.”

Driving that urge to save could be an attempt to quell financial anxieties that developed in childhood. “If a person grew up in a home where money was scarce, and experienced parental disagreements around money, there may be a fearful or negative feeling around money,” says Nancy Curtin, a certified financial planner at New York-based KBK Wealth Management.

“The point of money is to provide safety, but also to allow you to do things with your life,” says Dr. Green.

Anxiety around money can be both beneficial and harmful, depending on how it manifests itself in a person’s daily habits. “This can cause a person to become either extremely frugal…or to develop the attitude that they need to spend it all before it runs out,” Curtin says. “Another person may have grown up with abundance, but if they are not taught from an early age that someone had to work hard to attain that abundance, they may become a spendthrift.”

Financial psychologist and certified financial planner Brad Klontz has been studying these learned attitudes that drive our financial behavior for years. “We all have money scripts—beliefs that are passed on from our parents, our grandparents, our culture,” he says.

The Dark Side of Over-saving

Compulsive savers “look good on paper,” says Dr. Klontz, explaining that their commitment to saving and frugality make them better-positioned to handle financial hurdles down the road. But even these healthy behaviors can become a burden if taken too far.

Ironically, they can even be detrimental to a person’s financial health. For example, someone too concerned with building up a trove of cash for emergencies may be missing out on bigger returns in the stock market, and efforts at frugality—like hours spent clipping coupons or meticulously tracking spending—may cost someone more of their (valuable) time than they realize.

There’s a darker side to the drawbacks, too: an obsession with saving can even eclipse health and happiness. “In the extreme, I’ve seen clients neglect medical care,” says Klontz. “It’s the millionaire that won’t visit the dentist because he’s too afraid to spend money.”

Once they are set, financial habits are difficult to change. There’s a good chance that spending will always feel like pulling teeth for those with deep-rooted anxieties about money and that saving will always be a challenge for others. But even if our belief systems are cemented in childhood, there are ways to break the bad habits that have formed alongside them.

Find the source of your relationship with money. According to Klontz, the first step to fixing your financial shortcomings is taking a good, hard look at your feelings about money. “Ask yourself some questions,” he recommends. “What did your mother or father teach you about money? What are your biggest fears about money? What are your most painful financial memories?” Only once you understand the source of your assumptions about money—whether you compulsively save or like to live large—will you be able to challenge them.

Know when to get a second opinion. For those who often let money anxieties get the best of them, talking to an unbiased expert like a fee-only financial planner can provide a much-needed dose of reality. The same strategies that help people who have a hard time saving may be beneficial to compulsive savers, too. The trick is knowing when you have saved enough and should begin diversifying your assets.

“I have my clients set a savings goal so that they will have enough cash to live for at least six months if they were to lose a job. Then I have them add another 10% for good measure,” says Curtin. Once that goal is met, that cash should be allocated toward specific investment goals, like retirement. There’s an exception here: if you have short-term savings goals like saving up for a house or a vacation, it’s wiser to keep those savings in cash, where the money easiest to access.

Hold yourself accountable. Checking in with yourself regularly about your account balances to make sure that you aren’t hoarding cash in a low-yield savings account (or under the mattress) is critical. And while it may not come naturally to compulsive savers, prioritizing personal fulfillment is critical.
“The point of money is to provide safety, but also to allow you to do things with your life,” says Dr. Green.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.