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Counting on future income increases, and always assuming you’ll make more money later on in life, can result in poor financial planning and decision making in the present. Learn how to stay grounded in your current financial reality while still reaching for future income goals.

The Danger In Assuming Future Income Increases

 

Assumptions help us expedite many of our day-to-day errands and tasks. Relying on previous experiences and past evidence provides a context for more informed decision making… most of the time. When it comes to financial planning however, assumptions don’t always serve us well.

 

 

One common assumption among young professionals is that salary will always increase. While this may have been a rather safe supposition in the past, the job market and economic climate of the past eight years has proved otherwise.

While income may very well grow for many skilled and determined young professionals over time, counting on future income increases entirely, and always assuming you’ll make more money later on in life, can result in poor financial planning and decision making in the present.

 

The Consequences of Assuming Future Income Increases

 

One of the most common mistakes young professionals make when operating under the assumption that they’ll make more money in the future is living beyond their means.

 

 

If you bank on a future salary increase to fund the set up of a lavish lifestyle, you’ll have to allocate all that extra income in your future towards paying off your past debt.

Living beyond your means now also puts a lot of pressure on your future self. By pushing your present expenses beyond what you can reasonably afford, you’re essentially taking a gamble by banking on a future pay off.

But what if that pay off never comes? With debt mounting from years of living beyond your means and no savings, you may find yourself much worse off than if you had lived modestly, within the parameters of your initial salary.

The other big downfall of assuming higher earnings in the future is waiting to plan for long term financial goals, like retirement and savings, until bigger paychecks start coming in. Pay increases generally take time, and the more time that passes, the more financial demands tend to increase- weddings, homes, babies, schooling, etc. If you don’t prioritize saving on your current income, you’ll keep finding excuses to put off financial goals – even as your future income increases.

 

How to Stop Assuming Future Income Increases

 

To keep yourself from operating on the potentially harmful assumption of higher future earnings, keep yourself grounded in the numbers of the present by budgeting for your current salary.

Create a spending plan using last month’s income to budget for this month’s expenses, i.e. a zero sum budget.

Incorporate your long term savings goals into that monthly budget now, so that you can maintain the habit of funding your emergency and retirement funds at all times – even when challenges like restricted income or increased financial demands arise.

Yes, looking ahead towards the future is an important part of proper financial planning, but operating on assumptions of future realities that might not necessarily come true can prove dangerous- leaving you vulnerable to all kinds of financial pain.

 

How do you keep yourself grounded in the reality of your financial present while planning for the future? 

 

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67 responses to “The Danger In Assuming Future Income Increases

  1. I fell into that trap just this year….there was a lot of talk about salary increases this year, but then our business results tanked during the last few quarters, and now it’s just not happening. Disappointing…..but hopefully things will turn around soon.

  2. I think this is a good argument for just living well below your means at any income level. It’s never good to assume you’ll make more at any point- life happens! =/

    1. It certainly does. Unfortunately, I think too many people just assume it’ll get easier, when in reality, that assumption can make things much harder later down the line.

  3. It’s important because of liefestyle inflation too. If you start off already spending more than you can afford, when you get that pay raise you’ll probably want to spend even more.

    When I was just starting out I did stretch myself a little thin. I got lucky and all my plans worked out. I’d probably have a much different message otherwise.

  4. Love this post! Sometimes I try to create a future budget (of more than a year out), but it is just so hard since there are so many unknowns. Instead, I am trying hard to focus on what’s going on now and hopefully everything will work out positively later.

  5. I’ve done that in the past when I’ve worked full time. I’d bank on a bonus or tax return then spend on what I wanted in the present. Dumb, dumb idea! I’d never do that now. Life is too unpredictable. But, there is one area that it MAY be ok, and that’s investing in yourself, equipment you may need for a business, education. But proceed with MUCH caution!

  6. A lot of people tend to make the mistake of assuming a greater salary in the future… I was one of those. I used to say things like “oh I’ll pay it when I get my raise.” I’ve learned a lot since then and now I budget for the salary I had last year. I got a raise this year and it goes straight to savings. Any new raise or bonus that I get will go straight to savings. I might need to adjust my budget based on inflation someday, but it is working for now.

  7. Great post. It definitely hit me like a ton of bricks when I entered the real-world work force and discovered that “promotions” in responsibility and title often do not come with a pay raise, often with a paycut, even. They position it like, this is a stepping stone to getting where you want to get in the company, but it’s certainly disheartening. I think the days of getting a big raise every year are long gone, unfortunately.

  8. I agree, Stefanie. While we certainly hope that our income continues to steadily grow, there will certainly be times it won’t or may even lessen. It’s always best to live within your current means. I typically see younger people, new to the workforce, who assume their future income will always grow. This can be especially hard for someone who might have seen their income increase rapidly and suddenly stall. You definitely need to be careful and conservative when it comes to projecting future income.

    1. I see it a lot in young people too. What’s frightening to me is that their income might not increase, but their expenses likely will as they progress through life and start families and settle down. If they’re already building debt as young, twenty somethings, what kind of future does that put in place?

  9. This is a great point, but sometimes hard to put into practice. I know in college people become accustomed to living above their means simply because of how difficult it is to pay for college tuition, rent, books, etc. while going to school full-time (not to mention most jobs are low-paying). I think it’s an important adjustment to make after college, though, and would encourage people to find ways to increase income if they want to increase their “means” in life.

  10. I think about this pretty frequently. My job is very secure, but what if my boss suddenly retires. Everything can change in an instant. The biggest problem with people I have helped with their finances is increasing their spending over time. The people with the biggest finance problems are the folks making more money. They assume it will stay this way. I sit down and ask them to think about their situation…how is it that you are making more money than you ever have but have less money than ever. It’s good to make more money, but if you continually increase your spending…you will have less available money than when you made less and were living frugally. Need to love money more than stuff or you will be “always working and always poor” and that life sucks.

    1. I understand that having children and buying a home sucks up a lot of money as you get older, it’s the other additional spending that I have trouble understanding.

  11. Great advice and it will serve many to hear it. I can’t recall how many times, I’ve heard I work too hard to live on a budget, this is just insane talk. They live on more than they make or just below it, and do not save or invest. If you cannot afford to save or invest, you need to reevaluate your situation. IF the reason you’re not saving is due to paying off massive amounts of debt, then it’s an allowable reason.

  12. Mr. Maroon and I are guilty of assuming pay raises will come. However we don’t actually act on them. We like to talk and dream about the future quite a bit. So in those musings, we tend to talk about our plans for future income growth – these days it’s all about increasing our savings rate!

    1. I think musing about the future in a positive way is always healthy and prepping with good financial planning is a must, it’s just the preemptive spending that could get people into trouble.

  13. This was one of the reasons why DH and I decided to keep with the idea of living on 50% of our household income, even after I had been living on 50% of my sole income during my debt payoff years. We don’t have the ability to see the future but we can try to limit financial the damage that it may cause by continuing to live well below our means.

  14. Great post!! I totally agree 🙂 Though, my husband more has the mentality that if he has more to work for, he will work harder. I do get that to an extent, too. We are both self-employed though so we can decide to sit around or we can decide to get off our butt’s and work! But…in a perfect world we would get off our butt’s and work and SAVE all that money haha!

  15. Great post and a very important concept. I had assumed that my income would increase basically immediately after I finished my PhD, but boy was I wrong! Thankfully I did not act on that assumption by living beyond my means and I’m very glad.

    1. I think that probably happens a lot to people who pursue advanced degrees. The pay bump (if it comes) takes longer than most anticipate- and for those who aren’t careful- it can be dangerous.

  16. Interesting post. I just wrote one on the same topic on The Jenny Pincher recently. I fell victim to this after I graduated college. I assumed I’d be “making the big bucks” and ended up spending way too much money that I now am still paying back (almost 3 years later). The consequences of this are real.

  17. Excellent post. I think young professionals (especially doctors and lawyers) do this. There’s the feeling that you’re a walking annuity, when really, the future is unknown and your debt carries risk. That’s why I’m so focused on repaying my law school loans now. And if I do end up increasing my income in the future, I will deal with it then.

  18. I love posts that challenge common assumptions that are all too easy to make! It’s such an easy trap to fall into. We imagine a college degree will give us a decent salary, but that’s not always the case. You never know when you might decide to take a pay cut for certain reasons, either. I never spend based on what I might be earning in the future (especially as a freelancer!). I’m very cautious about that after seeing some relatives experience job loss during the recession.

  19. I was a HUGE victim of this type of thinking. I used to get large bonuses paid in February, and I would spend a bunch of money in December and January in anticipation of those bonuses, and it trapped me into a way of life that was not sustainable. It’s hard not to thinking about future income increases, but it really only messes with your money today if you focus too much on it.

  20. So far, each of the 4 years I’ve been with this company I’ve gotten a bonus and a raise. But given the work I do, the raises must have a logical stopping point. I mean, seriously, I’m already getting paid more than I think is smart. Not that I’m complaining.

    I certainly hope for the trends to continue, but I try not to rely on the idea of either thing happening. Instead, once I get told what my rate will be for the next year, I schedule out a budget for the year based on that. And try to assume that I’ll be capped at that rate forever. Keeps me honest in our budget goals.

  21. Hi Stefanie. I think this is a really interesting way to put it, because it really is a balance, no? I love the “one day when I’m making xxx,” dreaming because it helps motivate me with some longer term goals. I guess luckily for me I’ve never been the type to live beyond my means… and my husband and I have currently cut back even more as I transition into different employment. Great advice. Enjoyed the post!

    1. Dreaming is definitely motivating and looking ahead is a good way to kickstart savings and retirement, but spending in anticipation of a future that’s not guaranteed can get dangerous. Best of luck with your transition!

  22. I always felt it dangerous to count on future raises or bonuses to justify busting budget for something. I believe its good to hope and think about planning for those raises and bonuses to increase existing debt payback and savings but not to take on more. I think this assumption issue is a major cause of many loosing their homes over the last recession buying houses they couldn’t afford now with the thought they would have more money in the future.

  23. Great post Stefanie. I saw this phenomenon in full force when I was in school. A few months before graduation, a number of students already started taking out loans for luxury cars…before they even started working! Talk about getting off on the wrong foot. Add student loans on top of that and you have a recipe for disaster.

  24. Well said. Living beyond your means when you’re young also traps you for the long term. You have to keep working in order to pay for your lifestyle. If you hit 40 and decide you want to do something completely different (and less revenue-generating) with your life, you might not have that option if you lived high on the hog all through your 20s and 30s. I prefer the freedom that my low-cost lifestyle affords me!

  25. A big old job loss can be a big old wake-up call! I used to always hear, “Live like you’re making what you would on unemployment, that way not only are you already used to it, you can save or invest the balance.” Definitely good advice.

  26. I do admit I have the expectation that our pays will increase but I sure as heck don’t use that to plan. Our plan for retirement in 10 yrs is based off of our current numbers. ( with assumption of a 5% return in market) if we did get pay increases that would just pull in the date.
    Though I am MMM and Ramit Sethi optimistic and know that people who fight for better pay are more likely to get it.

    You shouldn’t assume you’ll just get it but I think it is safe to assume its possible.

  27. I think one of the perks to working in the arts is there’s more of an acceptance of the total lack of stability and an understanding that salaries aren’t linear. I always keep the bare bones minimum I can live on in the back of my head and am extremely hesitant to take on any kind of recurring bills… because that effects how much you HAVE to make, which is sometimes a frightening number to grapple with.

  28. Oh yes! We’ve been cured of counting chickens before they hatch. It’s been a long rough patch, but the bright side is there are many good financial lessons to be had by our recent tangle with a shaky economy. When you’re young – you’re invincible and visualizing less than stellar results it a challenge. Life has a way of breaking that bad habit. LOL! Great points indeed!

  29. Great points here! I read a book recently that really got me thinking about planning now for the future and my retirement titled “Build Wealth and Spend It All” by author Dr. Stanley Riggs. Dr. Riggs shares personal experience relating to what will happen to your money once you are too old to enjoy it, and how to strategically spend and enjoy it before that happens. I am responsible for my families financial situation and take every opportunity I can to teach myself planning and strategies for financial gain and stability. A lot of financial help books go over my head so I truly appreciated the way Dr. Riggs writes on a personal level, it is a very down to earth and relatable read with some really practical strategies. Really worth a look if you’re interested! His site has more info http://buildwealthandspenditall.com

  30. I agree that it is dangerous to make assumptions about future income. I think many people believe that if they are laid off they can always get another job, even if it takes awhile or they need to go into a different field. But most don’t consider what happens if you become disabled and are not able to work for a period of time, or even permanently (and according to Social Security, “Just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67”). If you can live not just within your current income, but below it, you can prepare a safety net for whatever comes your way later in life.

  31. I love your point that we shouldn’t wait to start planning for long term retirement goals. I see so many fellow 20 somethings thinking that its not time yet. It is time!!!! Making retirement savings a priority is key. Being active in learning about different parts of your portfolio and keeping that portfolio diversified is helping me to get closer to financial freedom and security. I recently decided I needed to gain more knowledge regarding my annuity strategies. I found a great book called ‘The Annuity Stanifesto’, by Stan Haithcock. It really motivated me to research my options, and I even was able to reach out to the author himself on his website (www.stantheannuityman.com). Hopefully I’ll be able to enlist his help in the near future. I can’t recommend this book enough.

    Thanks again for great reminder. Lets all stop waiting!

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