MP Dunleavey

Uncommon Sense

Earning more without burning more

You get a raise and -- poof! -- it's gone. That's what happens when you use a raise as an excuse to splurge and lose sight of your financial goals.

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the continuing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

Why do most people want a raise? Because you believe that as soon as you have that extra cash in each paycheck, you can relax.

Now you'll be able to put more toward debt.

Now you'll have a little extra every month to save.

Now you'll be able to fix the washing machine.

Instead, the more typical pattern is that you end up spending a little more on living and not so much on your goals -- because it feels so good to loosen that belt, finally.

Next thing you know, the increase you thought would be your salvation mysteriously vanishes into the shifting sands of your bank account.

At least, that's what happened to Lyndsey and Stephanie in their late 20s.

They each received double raises -- bumping Lyndsey's income from $43,000 to $52,500, an increase of 22%, and Stephanie's from $37,000 to $50,000, an increase of 35%.

Yet to their chagrin, they both discovered that earning more money doesn't make it any easier to stick to your financial plans. "I make about $300 more per paycheck -- that's $600 a month, which is huge," says Stephanie. "But I haven't been doing the right thing."

Ideal -- and reality

As the Women in Red progress and I become better acquainted with the workings of the human financial psyche, I'm constantly amazed by how our dealings with money rarely revolve around ... money.

If only finances were involved here -- and not a tangle of expectations and emotions -- then Lyndsey would have taken her $9,500 raise, and Stephanie her $13,000 raise, followed the 60% Solution and put:

  • 10% of the raise into retirement each month.

  • 10% toward debt.

  • 10% toward short-term savings.

  • 10% for fun.

  • 60% toward their committed or essential expenses.

Naturally, that's not quite what happened. Stephanie and her husband had a couple of weddings to attend. Lyndsey found herself traveling to New York City more frequently. The holidays intervened.

They ate out a bit more, shopped a bit more -- in short, lived it up.

Taking steps toward progress

To each woman's credit, they did take small steps toward their financial goals.

Stephanie:

  • paid what she and her husband owed on their sofa and computer (about $2,000);

  • paid down her credit card debt to about $1,800 from $2,500;

  • started contributing 5% to her 401(k);

  • and put a $2,000 family gift toward her car loan, bringing it to $10,500, down from $14,000.

Lyndsey:

  • doubled her 401(k) contributions to 4% from 2%;

  • squelched her plastic spending habits ("Before I joined the WIR, I was adding $4,000 a year in debt," she says. "But I've stopped.");

  • and reduced her $12,000 credit card bill to about $11,000.

But they both know they're not making their raises really pay off.

Money isn't the issue

The problem clearly isn't financial. Lyndsey's net increase comes to about $500 a month; Stephanie's is about $600 per month.

Their basic living expenses remained about the same; Lyndsey's rent even dropped to $585 from $650 per month.

Yet not only have they been making slow progress toward their debt-reduction goals, but Lyndsey hasn't put a dime into short-term savings and Stephanie saves only $50 a month. That's only about 1.2% of Stephanie's gross monthly paycheck, well short of the 10% target, which is designed to create a cushion for unforeseen expenses.

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When to ask for a raise
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Case in point: Stephanie and her husband ended up owing more than $900 to the IRS because they didn't change their withholdings to adjust for their increased earnings. This is a common oversight -- but because they lack the savings, they've been scrambling to set aside enough to pay the bill.

Meanwhile, Lyndsey admits to being erratic with her credit card payments. She tries to stick to her $600 a month target, "but sometimes I just pay what I think I can afford."

So, what's the real problem?

Fortunately, I operated at a similar level of cluelessness for most of my life, so I can't justify getting impatient at these slip-ups.

At the same time, it's an effort not to tear my hair and implore the heavens to take mercy on me. Or at least give me those raises!

Both Stephanie and Lyndsey have been in the Women in Red long enough to know what to do. Why aren't they doing it?

Continued: Secret hopes and peer pressure

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