Previously wrote about how and why we need to fool ourselves from time to time by using “personal double standards” for our peace of mind.
Now let me write about instances on how to fool ourselves the right way, and how to differentiate it from complete detrimental foolishness.
Annual Increase or Higher Net Income: Plan It Correctly
Bonuses and annual increase have started to come in. Crediting days are looked forward to by our fellow employees. Some salaried individuals make a mistake by including in their revised monthly budget their anticipated salary increase. They already plan additional expenses from this additional income, such as higher postpaid plan, upgraded internet or cable plan, or purchasing a new gadget on installment. Increased income = increased capacity but capacity is not equal to expenses. Increased capacity should actually be viewed as increased savings and investment capacity.
Don’t fool yourself, just because you have higher income now doesn’t mean you may have higher expenses too. Worst case scenario is you end up with higher expenses than your annual increase. Maybe this is the reason why in spite of many years of annual increase, you don’t get richer?
The secret sauce should be to plan where to invest that additional income if ever. Better if you can commit the amount to a regular investment scheme such as an EIP, or a salary-deducted Pag-ibig MP2, or a VUL etc. That way you won’t even see the additional income, once again sort of fooling yourself. It just grows on the side. Or pay-off the “sins of the past” by increasing your allocation to paying off existing debt, and graduate from loans sooner. It’s not wrong to reward oneself and get some treats but splurging one’s salary increase on an increased monthly expense is not the way to go.
Bonuses: What Bonuses?
Same with bonuses, may it be 13th, 14th, 15th, midyear, profit-sharing, whatever bonuses you have. Especially this year since we can expect a higher bonus payout due to increased tax ceiling. For me one trick is do not include bonuses in your annual capacity planning of cash flow so that you won’t depend on it for your monthly survival. That way you are really forced to make the ends meet monthly. That way when the crediting of bonuses comes, the big cash windfall doesn’t disappear quickly since it was not committed to anything yet. Act as if you were not expecting it. You only need to use a portion of it for treats, the rest may go to investments or savings or major expenses that add to your net worth. Or to realizing your goals.
Lastly, a way for us to feel good in paying off our expenses is to track our net worth, not just our assets and savings. That way we instill in ourselves that avoiding debt and paying off debt, albeit painful at the start, actually helps increase our financial net worth. In fact we should do it religiously as this is beneficial albeit painful (like exercise), whereas expenses lessen our assets, and hence our net worth.
In savings and investments, it’s not just what you know, but also how you manage your emotions, your expectations. It’s about how disciplined and patient you are. It’s how you hide you’re extra money, commit it at times and at times not, both to avoid spending it foolishly.
Photo: thumbs up by .reid.