Getting a pay rise feels good. It’s recognition that you’re doing well, your career is moving in the right direction and, quite simply, you’ve now got more money coming in every month. But I think what happens next is actually far more important than the pay rise itself.

Over the years, I’ve seen people’s incomes increase significantly. Sometimes they’re earning £20,000, £30,000 or even £50,000 more than they were ten years ago, so you would naturally assume they must be in a much stronger financial position too. But that isn’t always the case. Some people earn considerably more but somehow don’t feel any better off. Their savings haven’t really increased, their pension hasn’t changed dramatically and they don’t necessarily have any more financial freedom. In fact, sometimes they feel just as dependent on their salary as they did when they earned much less. Usually, there wasn’t one terrible financial decision that caused it. It just happened gradually.

You get a pay rise and suddenly you’ve got another £300 or £500 coming into the bank every month. Maybe you change the car. Perhaps you move to a slightly bigger house or a nicer area. You book better holidays. The kids get older and everything seems to become more expensive anyway. You eat out a little more and stop thinking quite so much about whether you should buy something. None of those things are necessarily bad decisions. Money is there to be enjoyed too, and I certainly don’t believe the answer to financial planning is to save absolutely everything for some distant point in the future and forget to enjoy your life now.

But we get used to it incredibly quickly. The things that initially felt like luxuries gradually become normal. The nicer car just becomes your car. The bigger mortgage becomes another direct debit. The more expensive holiday becomes the sort of holiday you take. Before long, the extra £500 a month that once felt like a huge amount of money has completely disappeared into everyday life. This is lifestyle creep, and I think one of the reasons it’s so powerful is because you barely notice it happening.

There’s another side to this that people don’t always think about either. When you permanently increase your lifestyle, you effectively pay for that decision twice. The first cost is obvious. If you spend an extra £500 a month, that’s £500 that isn’t being saved, invested or paid into your pension. But the second cost is potentially even more important. You’ve also increased the amount of money you’ll need in the future to maintain that lifestyle.

One of the biggest misconceptions around retirement planning is that the amount of money you need is somehow determined by what you earn. It isn’t. It’s much more closely connected to what you spend. Someone earning £100,000 a year but spending £80,000 may need considerably more to maintain their lifestyle in retirement than somebody earning £70,000 but happily living on £40,000. Your salary tells me something about your life today, but your expenditure tells me far more about how much financial independence is going to cost you.

That’s why every permanent increase in spending has a longer term impact. A new £500 monthly commitment might not seem particularly significant while you’re working and receiving a salary every month, but eventually that salary stops. At that point, the £500 still needs to come from somewhere. Your investments, pensions and savings effectively have to replace your salary. So when your lifestyle becomes more expensive, you’re potentially doing two things at the same time: putting less towards your future while also making that future more expensive to fund.

There is, however, another way to approach a pay rise. Decide what you’re going to do with it before you get used to having it. If you receive an extra £500 a month, perhaps you decide that £250 is going towards your life now and £250 is going towards your future. That could mean increasing your pension contributions, investing more each month, building your cash savings, reducing debt or putting it towards another financial goal. You still get to enjoy your pay rise and your lifestyle still improves, but your future improves alongside it.

Psychologically, I think this is so much easier than trying to cut your spending later. If £250 of that pay rise goes straight into your pension or investments from the beginning, you’ve never really become accustomed to spending it. Compare that with allowing your lifestyle to absorb the whole £500 and then, two years later, trying to find £250 a month to invest. Technically, the numbers might be identical, but emotionally they feel completely different. Taking something away from yourself feels like a sacrifice. Diverting money you’ve never got used to spending doesn’t feel anything like as difficult.

And over a career, these decisions can really add up. Imagine doing this not just with one pay rise, but every time your income increases. Every promotion, every salary review, every time your circumstances change and a little more money starts coming in. You don’t need to save every penny of it. I actually think that would miss the point. Enjoy some of it. Upgrade something that matters to you. Take the holiday. Make life a little easier. There is absolutely no prize for reaching retirement with the biggest pension possible if you’ve spent the previous 30 years refusing to enjoy your money.

But perhaps don’t allow all of it to disappear into a more expensive version of the life you already had. Give some of it to the person you are today and some of it to the person you’re going to be in ten, twenty or thirty years. A pay rise is one of those rare opportunities where you can improve your financial future without having to give up something you already enjoy. You just have to make the decision before the extra money starts to feel normal. 🩷

Disclaimer: The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

The right balance between enjoying more of your income today and putting more towards your future will depend on your individual circumstances, financial priorities and objectives. Before increasing pension contributions or investments, you should also consider your current expenditure, cash reserves and any shorter term financial needs.