Yesterday, over at Get Rich Slowly, there was a guest post entitled “How I Got Rich Quickly, Then Failed…Miserably.” While the income increase in the post was a little extreme ($33,000/year to $120,000/year in less than 8 years), the points that the author, Belinda James, makes are valid for anyone who experiences an income increase.

 

It’s popular in finances to say that you don’t necessarily need to make more money to be financially successful, and that is completely true. Much of being financial successful is really about how much you spend (and save). However, if you have the opportunity to make more money, it can really help you, but only if you’re smart about what you do with that extra money.

 

We’d like to touch on a few of the points that Belinda discusses:

 

“Find a good accountant” – We’ve ­discussed here before about whether or not to do your own taxes. We definitely believe the more money you make, the more important it is to hire an expert to do your taxes. Tax laws and codes are so extensive that there is no way someone who doesn’t work with them every day can understand it all. If you have a high income and are doing your taxes yourself (and don’t work as an accountant), it’s likely you are missing out on some obscure rule that could be saving you money.

 

“Don’t tie up a large chunk of your money in a car” – Not to say you shouldn’t spend some money on a good quality car, but you don’t need to spend an over abundance of money, even if you’re buying new. If you have the cash to buy a car outright, then it would probably make sense to do so. But in Belinda’s example, spending $43,000 outright on a car is probably not the best use of your increased income.

 

“Nothing lasts forever” – This seems to be where most people get into trouble when their incomes increase. They’re making more money, so they add new expenses. While there is not necessarily anything wrong with that, you have to be very careful. Wait until you’ve received a few paychecks and get a feel for how much extra money you really will have in hand. And when you do decide to add an extra expense, do so sparingly, especially if it’s to be an ongoing expense.

 

You may or may not be lucky enough to stay at your new income level (or higher) for the rest of your working career. You may or may not be lucky enough to always have steady income coming in. But if you add a bunch of extra expenses and do have to take a pay cut or be out of work for a time, what happens to that extra cost then? That bigger house or nicer car suddenly doesn’t seem so important.

 

But as Belinda says, not everything is about “getting rich.” Make sure to enjoy your income while you have it. Just try to decide first what the appropriate amount is to spend on “fun!”

 

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.
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