28 Apr 2014

I Got A Raise! Now What?

There are those times when we are showered with wealth! Okay, may be not showered but occasionally we do get some extra money. If we are salaried then we could get a raise or a bonus. For entrepreneurs, there could be a surge in profits. There are various ways to deal with it. You could spend it, save it or invest it. What do you do with it?

Let me narrate the story of my friends - Dollar, Pound,Rupee, Euro, Bitcoin
"Dollar" got a raise.
His income went up by 20% per annum. He simply lived the way he has been living for the last and saved the rest.

My friend "Pound" got a raise. His income went up by 30%. He went and bought a lavish car. He is still paying EMIs on the car.

"Rupee" got a raise. He invested it.

"Euro" got a raise. Right after he was informed that he was going to get a raise, he spent on buying a brand new motor bike. The raise was going to take effect four months from the time that he bought the bike.

"Bitcoin" got a raise. He bought a house. He took a 20 year home loan.

Are you like Dollar, Pound, Rupee, Euro or Bitcoin?

Let us discuss them one by one...

Save The Extra
Dollar is definitely wise since he saved the extra. He did not succumb to lifestyle inflation which is awesome. A lot of us think of extra cash as a way of buying something we have been eyeing even though we do not need it. Sometimes buying becomes a recurring expenditure and leads to lifestyle inflation. E.g. a more expensive cell phone plan would mean extra expenditure every month and is an example of lifestyle inflation. I like Dollar since he thought of stashing away the extra. It not only shows commitment to saving but also contentment.

Spend The Extra?
Pound and Bitcoin spent the extra that they got. Pound bought a car and Bitcoin bought a house. Pound bought a car which requires regular maintenance and expenditure. It is somewhat of a lifestyle inflation. If he can afford the payments and he did not take a car loan for more than five years, it is justified.
Bitcoin bought a house. The house loan payments can pinch but buying a house is somewhat of a reality. It gives most people peace of mind and pleasure to own a house. Bitcoin bought a nice place which he can afford. 

Spend Ahead Of Time? - I hope not!
No matter who you are, please do not follow Euro's footsteps. Please do not spend money in anticipation. Euro spent the money before the raise took effect. He emptied his savings and put the rest of the charge on his credit card. Things go wrong in life. The raise may not take place, you may lose your job, you may get a raise which is a little less than you anticipated because of company turnovers, losses, policies and decisions etc. The same thing with a bonus. The bonus due to you at the end of the year may or may not come. Do not look forward to spending something that has not arrived.

Invest The Extra... 
Rupee is definitely ahead of the game. He not only stashed away the extra but also invested it for the long term in mutual funds.

There are times when we get a little extra cash and we feel like splurging. We want to buy clothes, fancy gadgets, may be some new kitchen items, get some renovation work in our homes, a new car etc. For the most part, I hope we are like Dollar or Rupee. In the long run, Dollar and Rupee will be rich and will create wealth to sustain a sound and stable financial life.

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