Saturday, 24 November 2012

Many people work hard to get promoted and sometimes it takes years.  Once that rise in pay eventually comes they feel entitled to "spoil" themselves "a little."  That home renovation that they put on hold, new clothes and various other little things all now seem possible.  The peril is that it's possible more because a higher salary enables higher debt repayments: it's not so much that a pay increase brings forth a sudden increase in a person's cash holding.

A higher salary simply magnifies the spending habits a person already has.  If they are accustomed to purchasing on debt, then they just buy more stuff on their credit cards or increase their mortgage.  The bigger paycheck acts as collateral.  The taste of better food, clothes and cars becomes intoxicating and using any of that extra money to save or reduce debt becomes a distant sentiment.  The salary-consumption-debt cycle continues and in fact intensifies as a person's cravings and materialistic aspirations increase even faster than the size of their paycheck: They've tasted a BMW 3 series, now let's aim for the 5 series.  As a result, debt as a percentage of earnings can increase when a person earns more.

This is how an increase in pay usually leads to increased dependence on your job.  Ironically the things you buy can literally be referred to as the trappings of success.

Yet, a pay rise presents a golden opportunity to increase your margin of safety and set yourself up for greater things.  You can eliminate your debt: imagine having a positive net worth.  Now while having no debt is always a lovely thing, I will also admit it sounds a bit boring.  But with the extra cash you can save towards opening a business or creating some sort of venture of your own.  At worst you can contribute more towards a retirement fund, which would usher in earlier retirement for you.  Sure you can spend some of your increase on toys and life's finer things, but most of your new-found money (I recommend 80 percent) should go to either:

a) Debt repayment
b) Savings or,
c) Investments

Getting worked to the bone is the new normal

Let's face it: an employee earns every cent of their salary.  Companies extract all they can out of you.  With that promotion comes an increase in workload and responsibility.  You can't keep working at the level you currently do forever.  Time takes it's toll and I've often seen it on aged former colleagues.  They struggle to keep working at the pace management demands and by then it's too late for them to do anything but wait for retirement to come.

No job in this day and age is secure either.  You can be promoted today and retrenched next year.  I'm not trying to incite paranoia, but with globalization, ever-increasing automation and the desire to relentlessly cut costs, all companies are always on the lookout for where they can get things done cheaper.

Robots are reducing the need for people on assembly lines.  If you have a desk job you're competing with educated, job-hungry people across the world, many of them willing to do what you do for half the pay.  This is a fact of the new global economy, so instead of shackling yourself to your job by buying more stuff, you should use the money from any increase to pave a new way forward.  

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