How to effectively manage pay raise

You cannot afford to lose your financial discipline when a pay raise comes, but you should deploy additional strategies to maximise the extra cash, ARINZE NWAFOR writes

You are likely not a stranger to saving money or budgeting, but somehow you find yourself throwing caution to the wind when you get extra cash.

We can train our financial habits to detect how and why many income earners are careful with their basic salaries but are not with bonuses. Figuring out why we overspend when we get a pay bump is the first step to recovering our finances.

Avoid emotional spending

Yes, it is all in your head; that urge to buy an extra pair of heels or a designer leather bag is due to psychological, social and financial factors.

Salary earners and business owners must be careful of emotional spending, which is a feeling that one has worked hard enough to deserve a ‘big treat’ and so recklessly rewards oneself.

For an average income, one may not eat at a fancy restaurant or buy a fancy suit because they cannot afford it. However, lifestyle inflation means they may have unconsciously nurtured a desire that they could act on with a pay raise.

Everyone must learn how to manage a pay raise, especially in Nigeria, where economic conditions are tight. The country’s working class, whose disposable income has shrunken because of a devalued naira and high energy prices, is also set to experience a widespread pay raise. The new minimum wage of N70,000 promises to put more cash in many hands.

As of September 30, 17 state governors, including Ogun, Ekiti, Sokoto, Kebbi, Osun, Enugu, Borno, Zamfara, Kogi, Kwara, Gombe, Kano, Taraba, Delta, Rivers, Jigawa and Abia, set up committees to implement the new minimum wage for workers.

Meanwhile, 1.2 million civil servants in the Federal Capital Territory received the new minimum wage last month.

Edo and Adamawa States have also begun paying the new salary, while the Anambra State government promised to kick off payment in October.

More recently, Lagos State announced it would pay a minimum wage of N85,000.

A new salary structure means you should revisit budgeting as a tool to build discipline for wealth accumulation.

Don’t spend without budgeting

Budgeting involves creating a plan to manage your income and expenses. It will help keep you out of poverty by training you to live within your means and save for future goals. For the average salary earner in Nigeria, budgeting helps you reduce borrowing and maintain your sanity.

Anticipating a pay raise can be exciting. You just got promoted in the office? The prospect of a 10 to 15 per cent bump in the next credit alert is enough to make a worker go above and beyond at the office. You are filled with possibilities and plans for improved financial well-being.

However, without a well-thought-out budgeting strategy, it is easy to fall into lifestyle inflation. Proper budgeting can help you make the most of your raise, ensuring that the additional income contributes to long-term financial goals rather than short-term gratification.

The simplest form of budgeting involves tracking your income and expenses, setting financial goals, and adjusting your spending habits to align with these goals. Whether you are saving for an apartment in the choicest part of Lagos, planning for retirement, or just looking to build an emergency fund, budgeting will help you get there.

The Founder and Chief Executive Officer of Money Africa, Oluwatosin Olaseinde, encouraged budgeting for anyone expecting a pay raise, saying, “Before you spend that raise, determine your short and long-term financial goals.

“Is it to save towards your wedding, a new car, a retirement plan, future wealth generation, or a professional examination that could lead to a better job or high post? As you state the goal, create your budget and prioritise needs, not wants.”

He recommended paying attention to the most important things like rent, adding, “You can want a vacation to the Maldives once you get your pay raise, but you need to keep a roof over your head (pay rent).

“While budgeting, if you have outstanding debts, remember to pay off and prioritise the high-interest debt first. You should also consider some form of health insurance, like a health maintenance organisation.”

Historical perspective

A brief lesson in finance history will help deepen our understanding of budgeting value to an income earner.

Throughout history, various examples demonstrate how pay raises have impacted workers’ financial behaviours and the broader economy. Understanding these instances can provide valuable insights into the importance of budgeting and the consequences of not doing so.

The post-war economic boom (1945-1960)

After World War II, many countries experienced significant economic growth, leading to substantial wage increases for workers. There was a surge in manufacturing jobs and wages in the United States of America during the period known as the post-war economic boom. Workers who had endured the hardships of the Great Depression and wartime austerity suddenly found themselves with increased incomes.

Many workers then invested the higher earnings in homes, education, and consumer goods. The GI Bill in the U.S. facilitated access to higher education and home ownership for returning soldiers, further stimulating economic growth. However, not all workers were prudent with their newfound wealth. Some fell victim to excessive spending and debt accumulation. Their experience highlights the need for effective budgeting even during economic prosperity.

The oil boom in the Middle East (1970s-1980s)

The discovery of oil in the Middle East led to an economic boom in countries like Saudi Arabia, Kuwait, and the United Arab Emirates. Citizens and expatriate workers’ incomes increased substantially as these nations rapidly modernised and expanded their economies. While many took advantage of the increased wealth to improve their standard of living, there were also notable instances of excessive spending on luxury goods and services.

The value of budgeting and other financial literacy skills saved some earners when the oil market experienced downturns while others plunged into instability.

The tech boom (1990s-present)

The rise of the technology industry in the late 20th and early 21st centuries brought significant pay raises to workers in Silicon Valley, USA and other tech hubs globally. Tech professionals amass wealth as they often receive substantial salaries, stock options, and bonuses.

However, the tech industry is also known for its volatility. Many workers who fail to budget effectively find themselves in difficult financial situations during downturns or job losses. Conversely, workers with budgeting skills, including saving and investing, can weather economic fluctuations and build substantial wealth over time.

Steps for preparing for pay raise

When one is expecting a pay raise, they have an excellent opportunity to reassess their financial situation and plan for a more secure future. Follow these steps to help you prepare and make the most of your increased income:

Reevaluate your financial goals

Before the raise takes effect, reassess your financial goals. Having clear, well-defined goals will help you allocate your new income effectively.

Short-term goals include paying off loans, saving to repair your work laptop or buy a new one, or buying extra food to restock your kitchen. Short-term goals are those you aim to achieve within one to three years.

Long-term goals may include saving for retirement, buying materials to build a family house, or funding your children’s education

Create a new budget

Create an updated budget that reflects your increased income with your new financial goals in mind. Start by listing all your current expenses and categorising them as essential (housing, utilities, groceries) and non-essential (dining out, entertainment, luxury items). This exercise will help you identify areas where you can cut back.

Financial literacy advocate Olaseinde suggested practical budgeting tips: “A strategy I recommend is the 50-30-20 rule. 50 per cent for necessities like food, rent, electricity bill, fuel, data, health and other utilities.

“Let’s assume you were earning N2m monthly, N1m will go into these necessities initially. If there is an increase of 25 per cent in your pay, that is, N2.5m, then set N1.25m aside for these necessities per month and you can budget towards that. 30 per cent for discretionary spending like cinema, fashion and beauty, ‘Asoebi’ (traditional event uniform), dining out, short vacations and many more.

You worked for it so you should treat yourself. With the 50-30-20 rule, the increment or raise will reflect on (sic) your lifestyle without destructive lifestyle inflation.

“20 per cent for savings, debt repayment, investment, retirement plans and others. This way the more you earn, the more you save. When you were earning N2m, you saved N400,000. When you start earning N2.5m, you save N500,000 per month.”

She added that the 50-30-20 rule could also be modified a little, saying, “For example, you can apply the ratio on your main pay before the increase, that is, N2m following our previous examples and develop a 30-30-40 ratio or 25-25-50 ratio to the increased portion if your financial plan is geared towards more savings.”

Increase your savings rate

When you think about a pay raise, see your savings increasing. Rather than increasing your spending as you earn more, aim to save a significant portion of your raise.

You can start an emergency fund, retirement savings or investment account. These tips will pay off in the long term, as the Director of the Centre for the Promotion of Private Enterprises, Dr Muda Yusuf, advises, “This (pay raise) is the time for proper planning of whatever we want to spend on. And where it is possible, also do some savings.

That is also good because, as a family person, for instance, even as individuals, anything can crop up at any time that requires financial injection and things like that.”

An author, Arese Ugwu, gave the principle simply in her book, ‘The Smart Money Woman: An African Girl’s Journey to Financial Freedom’.

Ugwu said, “The goal is not to look rich but to be rich. Your savings should always come first before the luxuries.”

Avoid lifestyle inflation

We need reminders that lifestyle inflation is one of the biggest risks when receiving a raise. It is natural to want to improve one’s quality of life, but it is better to keep one’s spending in check to avoid eroding the benefits of your increased income.

Practical steps include setting spending limits by cutting out non-essential spending and sticking to your resolution. You can automate your savings so your raise goes to savings and investment accounts to prioritise your financial future over discretionary spending.

Seek professional advice

If you need help allocating your increased income, hire a financial advisor. A professional can provide personalised advice based on your financial situation and goals, helping you make informed decisions about budgeting, saving, and investing.

The Chairman of Boulos Enterprises Ltd, Robert Ugbaja, advised income earners to save more and invest, adding, “It doesn’t matter how much; you can make small investments. There are so many advisory agencies and businesses.

“The only thing they do is guide and advise people on how to invest. There are things like mutual funds, where you do not need to make heavy investments by yourself, but you can pool resources and join other people. These companies have the expertise and know-how to do it.”

Reward yourself eventually

Managing a pay raise requires grit. Your future self will be glad you cultivated your budgeting and investing skills. While budgeting and saving, eat healthily and be fit to enjoy the benefits of your financial discipline.