young & savvy

Got a raise? Save the difference, donate more

Combat the human tendency to spend more as your salary increases

One of the more nerve-wracking moments each year for any worker is surely the day of the salary letter.

Did you get promoted? What's your pay increment? These key questions are addressed in that short, frantically read annual document from your employer's human resources department.

Naturally there will be a wide range in terms of salary adjustments.

The exact date of the salary letters will depend on your employer's financial year but, from my observations, it is mostly around the start of the year.

By now I hope you're over the initial euphoria or disappointment.

Next we have to adjust our financial plans and budgets, keeping in mind our (hopefully) higher salaries for this year.

One of the common pieces of advice from financial bloggers is that you should try to maintain your current level of spending, no matter how much more you will be earning.

Of course, with a higher salary you will have to contribute more to CPF and pay higher income taxes.

But besides these, the rest should be spent on savings, investments, repaying loans and even charity donations - rather than on raising consumption.

It doesn't take a mathematician to realise that such a habit will be extremely beneficial to your finances in the long run as your salary rises.

You will be able to achieve financial freedom much faster, where your assets and passive income overtake your expenses.

Alas, it goes against human nature, which is to simply spend more as you earn more.

"It's not that we suddenly need to buy more just because we make more, only that we can, so we do," said a 2010 article by Canada-based blogger David Cain.

"In fact, it's quite difficult for us to avoid increasing our standard of living (or at least our rate of spending) every time we get a raise."

Mr Cain quoted the so-called Parkinson's Law, the adage that "work expands so as to fill the time available for its completion".

Basically, you spend more time on a task when you are given more time to do it.

"Most of us treat our money this way. The more we make, the more we spend," said Mr Cain.

It doesn't even have to be a large expense such as a branded bag, a luxury car or dining at a fancy restaurant.

For instance, you may upgrade from supermarket coffee to that from coffee shops, and finally to "branded" brews from Starbucks or Coffee Bean and Tea Leaf.

Basically it's the same stuff, tasting much the same - but you are paying more for it.

Mr Cain calls it being "careless" with your money, spending on things that don't add to your life.

Fortunately, it is possible to remain frugal, and the famous example of billionaire Warren Buffett should be encouragement to all of us.

The investor, the world's fourth-richest man, lives in a humble five-bedroom house bought in 1958, in the US city of Omaha.

His home is worth about US$700,000 (S$886,100) today, which means your property will probably be valued higher if it is a condominium unit or house.

"How would I improve my life by having 10 houses around the globe? If I wanted to become a superintendent of housing," Mr Buffett told British broadcaster BBC in 2011.

"But I don't want to manage 10 houses and I don't want somebody else doing it for me and I don't know why I'd be happier."

Unfortunately, my expenses have also risen since I started working. Just look at my spending on Japanese food, which I quite like.

Throughout my university years, I never stepped into restaurant chain Sushi Tei and ate only once at fellow brand Sakae Sushi.

I couldn't bear to spend the money - $20 or more per person. And that is only if you are cost-conscious, ordering the relatively low-priced rice and noodle dishes and avoiding the more pricey sashimi.

Rather, I survived well with the occasional supermarket sushi that my parents brought home.

But in the years since I started working, I have signed up for both the Sakae Sushi and Sushi Tei membership cards, showing how often I dine there nowadays.

I can't help but imagine how much more I would have saved if my lifestyle had remained simple.

After all, supermarket sushi and hawker food doesn't taste half bad. And dining at a restaurant loses its novelty after a while.

However, it's hard to return to simpler ways after starting on a higher standard of living. It's human nature to want to keep buying something you like. Best to remain frugal and not get started in the first place.

It's like expecting an iPhone user to switch - not to an Android device but to one of those old-school Nokia phones with black-and-white displays that are hardy enough to be used to open crabs.

Still, I have decided to take the first step to maintain my daily budget of $35, even after the latest salary adjustment.

It shouldn't be too much of a challenge as I've been living comfortably for the past year, and have tracked my daily spending.

While we should limit how much we spend on ourselves, we can give more to those around us.

If you are thinking about saving and investing, you are already better off than a good number of Singaporeans who struggle to make ends meet.

About 105,000 families here earn on average $1,500 per month.

This works out to 387,000 people who have only $5 a day for food and transport, said Singaporeans Against Poverty, a campaign by Catholic charity grouping Caritas Singapore and other partners.

My $35-a-day budget is a king's ransom to many of the poor people here - but we can all do our part.

I will find time to increase the monthly donations that I have been making to a local hospice.

I also intend to raise the amount I give my parents every month.

Being more generous helps us too. Studies show that spending money on other people makes us happier than spending it on ourselves.

So here's the nub of this issue. It doesn't quite matter what your pay increment was, or whether you were happy or upset with it.

Spending the extra cash on savings or investments is good. Giving more to charity is wonderful.

But spending on luxuries for yourself, be they branded goods, top-shelf coffee or restaurant sushi, should be regarded as a waste of money, or a rare indulgence at most.

jonkwok@sph.com.sg