I can still remember vividly how imprudent I was when I got my first promotion at work. You know that kind of feeling you get when you just received a huge chunk of money. It was the first time I owned that kind of money, so I felt on top of the world. The first thing that came to my mind was shopping. It suddenly occurred to me that I had so many things I needed to purchase and this was the moment I had been waiting for, so I hit the market. I even got some items on credit which required a hefty monthly payment. I didn’t have a problem with it because I felt my monthly paycheck was just enough to take care of that. But as the months went by, I realised that I had roped myself into a very tight corner. Many debts to pay off, no savings, no investments. In fact, I found myself back in the same spot I was in before the promotion. This recounts the story of a young accountant who made terrible mistakes with her first huge income.

Sounds familiar? This can happen to anybody. Many of us go off the rails with our finances the moment we get our first big raise. It is actually very easy to make very bad mistakes when you feel you have a lot of money at your disposal.

In this post, we will show you 5 financial mistakes people often make when they get a pay raise and how you can avoid them:

Compulsive Spending

You have been dying to get that new iPhone Apple just rolled out, and as soon as you got that raise you rushed to the nearest Apple store and purchased it. That is compulsive spending! This is usually linked to the excessive availability of huge finances. Moreover, when people have a lot of money at their disposal, they tend to spend blindly. Don’t go running to stores purchasing things just because you want it and not because you need it.

Know the difference between “needs” and “wants”. There is a big difference between what you want and what you need. Needs are the basic things that you require to live your daily life. While Wants are things that are not really necessary but you desire or wish to have them. Learn how to manage your expenses and put a limit on your spending.

Going for Credits

Just like the accountant in our story, many people purchase things on credit hoping to pay for it monthly as the paycheck comes in. It is best to use this strategy when you are sure you can pay off within a short period of time, not one that will spread out for a long period of time. Even if you must use this strategy, do not do it excessively (purchasing so many things of high value at the same time).

An alternative to taking credits could be, saving up from that raise to purchase that item later, if it happens that you really need it.

Not Reviewing your Personal Budget

Your budget plan before the promotion/raise should not be the same as now. The moment your monthly income increases, you should review your personal budget as well. This enables you to stay right on target and also manage your finances properly.

No Savings

The fact that you have an extra income now doesn’t mean you should throw your savings habit out the window. You might feel that you do not need to put money aside as you have enough to take care of any emergency that might occur. Strike out that thought!

In the case you lose that job, what would you fall back on? You never know what the future brings. Even if you don’t lose your job, you may need to take a big step higher in your life or your career, like starting your own business. That extra cash stacked away will definitely be of great use.

Continue to save and if you never used to save before, start doing that now! It is very important.

Financial freedom is something everyone wants to achieve but achieving this without having the right financial plan is nearly impossible. Make proper financial plans for your future.

Have any question with regards this article? Need help to plan your finances? We are here to provide you with the support and advice you need! Please contact us at careers@careerhubafrica.com.