It is expected for most people to adjust their lifestyles based on their incomes.
For example, for someone with a limited income, it is logical to first pay for all the basics like rent, transportation and the like, while having everything else falls into the luxury category.
But once you have some significant disposable income, you get some choice in terms of what lifestyle features you’d like to add to your life. Some may direct their extra income to acquire what they could not afford in the past, others may choose comfort and convenience like in hiring help or moving to a bigger or better place, while some may plan for the future and save. A combination of these choices is also common.
While each of these options can be justified, making the right decision for yourself and your situation hinges on many factors that include, of course, your personal preferences as well as your age and stage of life.
For example, someone in his or her 20s who is enjoying a well-paying job may be advised to save for retirement, but opting to spend the extra money on travelling, paying a decent car or just living a comfortable lifestyle doesn’t really spell a disaster for this person’s financial future — unlike someone who is approaching the retirement age and still living pay cheque to pay cheque.
Although the use of this disposable income is largely a personal matter, there are some considerations to keep in mind.
Debts
Many people forget that debt should be tackled before adding luxury or comfort — at least in part. If you have debts built up over the years, channelling part of your extra income to pay for personal loans, student loans or credit card balances is essential to moving into a healthier financial standing. In fact, paying down your debts should be a priority.
As far as long-term financing plans like auto loans or mortgages are concerned, it may make more sense to keep them running over their repayment periods unless you’re planning to relocate. In short, take a close look at your debts, and consider channelling some of your disposable income into eliminating them, especially if they have been growing with interest.
Safety net
Regardless to your age or stage in life, once you have a paying job, you should think of what you will do if you lose this job. Having a cushion of savings can help you navigate a period of unemployment with less stress, and focus on finding the right job rather than jumping into any job that covers your immediate expenses.
In addition, having some savings set aside could help you in case of emergencies — illness, legal issues, travel, etc. And although these problems seem unlikely until they happen, they could be very costly when they do. That is why when and if you have additional income every month, you should set a direct transfer to a separate bank account. Make sure you don’t dip into this account to take a trip or buy a new gadget. This should remain your emergency fund.
Goals
It is easy to fall into the lifestyle trap and forget about long-term goals that have some financial aspect to them. If you’re making some significant extra money every month and you don’t have major obligations, this could be the right time to pursue an MBA, take those extra technical courses, etc.
Many goals are shelved for financial reasons, and after a while they might be forgotten. Make sure that you go back and revisit those goals. Before committing, however, make sure that your additional income is sustainable for the period required to achieve these goals. For example, if you’re planning to pursue a two-year postgraduate degree, ask yourself if your current job would allow you the time for the study required and is likely to be there for the period. If not, will you be able to land a job with a similar pay fairly quickly?
By Rania Oteify
