Whether you get paid hourly or have an annual salary, you have a pretty good idea of just how badly your company or organization wants to keep you around. But better yet, you have an idea of how much money you take home each day, week, month and year. Powered with this knowledge, you can then calculate how much to budget for expenses, and, if you have too many expenses, you just need to find a higher-paying job or ask for a raise.
Except that's where a lot of people have it wrong. Your salary is not the first thing you should be looking at when you think about your budget. Nor should your expenses be based on how high your income is. Psychologically, it is very easy to think of the limit to your expenses as your income. Income is typically the first line on most budgets, and when you get a raise, inheritance or get lucky at a blackjack table, people often ask what you will do with your newfound wealth.
"Nothing!" said almost no one, ever. Nothing is the boring answer, and you do not want to be the party pooper. So, you buy everyone a round and tell them about the new car you've been eyeing.
But really, if you have more money coming in, your expenses should not automatically increase with it. The necessities of life have not changed. This is how you get absurd celebrity bankruptcies - entertainers earning millions each year manage to end up with nothing in their bank account because their expenses and lifestyle match their paycheques.
The societal norms of managers driving luxury vehicles and wearing expensive Swiss watches while mid-level employees have regular cars and department-store watches and new hires take the bus and crane their necks to find the nearest wall clock have set expectations that imply expenses need to scale with salary.
Now, I am not saying that you can't have nice things. Or convenient things, or things that you value. But I'd like to challenge you to look at your budget a different way – next time, cover up the income.
And, if you don't have a budget, we will explore how to make anything from a basic monthly budget to a long-term multi-year budget in future posts.