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Getting a pay rise at work can be an exciting time. You’re flush with cash and everything seems rosy and optimistic. It’s tempting to start imagining the ways you could upgrade your lifestyle with a bigger pay cheque – overseas holidays, a new car, swish dinners out – but is that really the best use of your new cash?
You probably know what we’re going to say: no, it’s not – at least in the long term. It might sound boring but using your pay rise as an opportunity to boost, or perhaps kickstart, your savings is a sensible and incredibly achievable approach.
‘What we’re talking about here is avoiding lifestyle creep,’ says Dr Campbell Heggen from Deakin Business School. ‘It’s very easy to change your standard of living based on the income you’ve got available, but if you can avoid that a pay rise is a perfect opportunity to increase your savings without actually reducing your current lifestyle.’
Confused about how to budget and save when you get a pay rise? These simple habits will help you avoid lifestyle creep and boost your savings.
It might sound counterintuitive, but getting a pay rise is the best time to save – not spend – when it comes to figuring out how to save money from your salary.
‘People are extremely loss averse and, in particular, we don’t like to feel the loss of money,’ Dr Heggen says. ‘With a pay rise, you get to maintain your current expenditure and standard of living and increase your savings at the same time. It’s a win-win. Of all the opportune moments, it’s definitely the best time to increase savings.’
What’s more, funnelling the extra cash you earn courtesy of a pay rise into savings takes advantage of the ‘fresh start effect’, a nifty psychological phenomenon that explains why we’re more likely to set goals after a new time period or event.
‘You’re more likely to adopt new behaviours after a big event like the new year, your birthday, a milestone or even at the start of a month or week,’ Dr Heggen says.
'With a pay rise, you get to maintain your current expenditure and standard of living and increase your savings at the same time.'
Dr Campbell Heggen,
Faculty of Business and Law, Deakin University
Research shows we know we should be saving more and spending less, but we struggle with self-control. One popular theory posits that from an evolutionary perspective we had to consume what we could in the present moment because our survival depended on it. Fast forward 10,000 years and we’re still hardwired to enjoy the now rather than save for the future.
‘As human beings, we’re not designed for long-term delayed gratification, such as saving for retirement,’ Dr Heggen says. ‘We are still relatively primitive humans living in a very complex technical world.’
As for how to budget and save after a pay rise, Dr Heggen says the most effective way to sidestep issues with self-control is to take the amount you want to save and put it into a savings account as soon as you get paid. Or, if you’re thinking more long-term, you could park it a term deposit, try investing in the share market or top up your super.
‘Put it aside then work with what’s left,’ he says. ‘This way, you’re not relying on your self-control to save what’s leftover – instead, you’re prioritising your savings.’
If you’re wondering, ‘how much should I save?’, Dr Heggen says putting aside the full pay increase – or as close as you possibly can to this amount – is ideal.
Even better, automate the transfer so it happens at the start of each pay cycle without you even noticing.
‘Your online banking will have a facility where on the day you get paid, you can have a transaction that automatically happens – you don’t have to go in and do it,’ Dr Heggen says.
‘This way, you’re not tempted to deposit a little bit less this month because things are tight. It happens automatically, you don’t see it and your savings stay on track.’
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