Earning more and becoming financially stronger are not automatically the same thing.
A higher income can change your financial life considerably. It can make a better home affordable, improve your holidays, let you save more, and make everyday spending easier. After years of working towards promotions and pay rises, enjoying some of that progress is entirely reasonable.
A pay rise gives you more money to work with. What happens next determines whether it also changes the financial life you are building.
This is one of the questions that sits underneath Calm Wealth: as your circumstances improve, is your financial position becoming more useful to you?
Your income quickly finds somewhere to go
A pay rise can disappear into everyday life surprisingly quickly. There are plenty of places for the extra income to go: housing, children, travel, convenience, subscriptions, and the small upgrades that become possible when more money is available.
There is nothing wrong with that. A higher income can change how you live. The question is what happens beneath a better lifestyle. If your expenses rise in line with your income, a pay rise may improve life now without creating more financial room. That’s why salary alone can be misleading. It shows your income, but not how much of it is already spoken for.
Enjoying more and committing more are different
When income rises, I find it useful to separate enjoying more from committing to more.
A bonus might pay for a long-desired holiday. A higher salary might make a larger mortgage feel manageable. Both can be good uses of money, but they affect your financial life differently.
One uses money from a period of higher income. The other increases what your life regularly requires.
Affordability is judged at the moment of decision, which makes that distinction easy to miss. We consider whether the monthly payment is suitable, if the direct debit is manageable, or if there’s enough left after all other expenses.
Those are useful questions, but they tell us about affordability today. They do not tell us what proportion of the improvement in our income we have decided to make permanent.
Money should improve life, and it is worth noticing how much of each increase you enjoy and how much you commit.
What else increased with your income?
A salary is easy to see. It appears on a payslip, and you can measure the difference between what you earned five years ago and what you earn today in seconds.
The changes elsewhere in your finances require a little more thought.
If your income has increased substantially, what has happened to your savings? What has happened to your debt? Are you putting more towards later life? Have your investments grown? Has some of the additional income remained available for things you may want to do in the future?
There will be periods when the answer to several of those questions is no. A growing family may need more of your income now. Buying a home can absorb money that previously went elsewhere. Caring responsibilities and other life changes can alter what you can build.
Financial progress does not happen in a straight line.
What matters is being able to see what happened. A higher salary can fund a better standard of living, strengthen your financial position, or do some of both. Knowing which one has happened tells you much more than the pay rise itself.
So, if you are earning more than you were three or five years ago, ask what that increase has built. Perhaps it has paid for experiences you value, improved life for your family and made the present more enjoyable. Those are legitimate returns on earning more. I would also want some of it, over time, to strengthen the financial life underneath them.
Decide while the increase still feels additional
This is why I think a good time to decide what to do with a pay rise is before you become accustomed to earning it.
If my income increased tomorrow, what would I want that increase to change?
Part of the answer may be something you want to enjoy. Another part might go towards savings, reducing debt, increasing pension contributions or investing. You may want to keep some available because you know a change is coming but have not yet decided exactly what that change will look like.
The useful decision is to make some of those choices deliberately, while the additional income still feels like additional income.
A pay rise tells you that your income has grown.
The more useful question is how you want it to widen your options.
Continue building Calm Wealth
If this has made you curious about what your current income is building, a good place to begin is The Enough Number, a free worksheet that helps you work out the annual cost of the life you want and compare it with the life you currently fund.
If you would like greater clarity about your financial position, priorities and next decisions, you can also explore how I work with individuals.
Grace Ogunjobi, FCCA, is a finance counsellor and author with more than 30 years’ experience in finance.
