Promotions, Inheritance, and other windfalls

Before I really get started on this post, I want to congratulate my college friend Frenchie on her new promotion and raise!  Congrats!  Well deserved.  Of course, this post is inspired by my friend and her promotion because it eventually lead to a discussion about what she was going to do with the raise.  This lead to the inevitable answer of “well, I’m going to go shopping.”  With my finance brain turned on, I saw this as an opportunity to build a bit of a concept here.  In general, if we’re living within our means and are focusing on saving and investing all extra earnings, then a promotion, inheritance, settlement, etc is going to present an awfully tempting situation to increase our consumption.  I myself am an example of not following this premise.

I received a big promotion and raise in December of 2011.  It was enough money to radically change my standard of living.  If I had been on top of my game then I would have taken most (we’ll say 75%) of my after tax income from the promotion and socked it away to save up for a house or something along those lines.  Instead I financed a new car which, although incredibly necessary due to the failing transmission on my Volkswagen, ate up 50% of the promotion.  Completely not ideal!  I mean come on now Brian, you’re basically being given free money for doing a good job.  You’ve got to save it!

Let’s say that right now, you’re living off $36K  a year after taxes.  It’s not an easy life by any means but you’re doing well with your budget and you’re saving 10% of your after tax income.  You’re good at your job and get a promotion and a raise each year.  It’s not much but it adds up: 5% after tax raise each year for five years.  There are two paths you can go with this: you can increase your spending and keep saving only $300 a month OR you can look at the raise and promotion as extra money and save the whole thing.  The differences are drastic: after the one year at $36K and the five consecutive years of raises you will have either roughly $54K if you put your raise towards savings or $24K if you spend the entire promotion (if invested at an annual rate of return of 5%).  That’s a HUGE difference over a short time period and can make all the difference over the course of an entire career.

Of course you can’t be expected to save every penny of every raise you’ll ever get.  And you won’t always get a 5% raise and you won’t always get a 5% return.  The point here is that if you’re diligent and live within your means (and work hard enough to actually get that promotion you deserve instead of letting it go to Ted, the guy from down the hall who totally doesn’t deserve it) that you can save a good deal of money within a short time frame.

If you have feedback, whether you agree or disagree, let me know!  Comment on the post or send me an email.  I’m always looking for new ideas and for items to discuss.