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A challenge for your next raise: Don't spend it before it's made

I'm pretty confident that I can find someone who is the same age as you, with a lower household income, who has all the same stuff you have but is saving more money. I'm talking house, cars, toys, renovations and everything.

There are a lot of us who could be better off financially, but for the same reasons we don't hit our physical fitness potential, we don't reach our financial potential. Many of us get stuck living paycheque to paycheque. We're treading water, but not really going anywhere. We're not getting fatter, but we're not getting fit either.

How can you break out of this cycle? Well, for starters: Don't mentally spend your next raise before you get it.

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I've had numerous conversations with people who were excited about an upcoming raise at work. It's almost always followed by a well-laid-out plan for how it's going to be spent, not saved.

Whether they earn $30,000 a year or $300,000 a year, I can tell you that many people will spend exactly what comes in the door, if not more. And while we have the best intentions of being more financially responsible when a higher income arrives, it rarely happens. We just buy more stuff. We upgrade. We adjust to a bigger paycheque.

We're really good at adjusting.

Which is why the best savers are the ones who have made the process automatic by using forced savings plans - perhaps a group RRSP at work, or ta systematic transfer of funds from a chequing account to a savings or investment account.

There is no reason you can't set up a forced savings plan right now. Every bank offers it. You can even set it up yourself online, in the middle of the night if you want.

In case you are thinking, "Well, I'm stretched thin as it is and I can't afford to put away $100 a month," most people find that they actually can - after they adjust to it. It generally takes a few months. If, after that time, you really find that you can't handle it, you can always take it down a notch, but I'm confident most people will adjust without too much trouble.

Like I said, we're really good at adjusting.

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The worst-case scenario is that you end up with a few hundred extra bucks on the side. What's so bad about that?

The trick is to set up the transfer to occur right after your paycheque is deposited. For the same reason that people tend to splurge the day after payday, you'll find it easier to save your money right after your cheque arrives. It always seems easier to funnel money when there are at least four digits in your bank account.

When you get your next raise, I challenge you to put 50 per cent of your take-home increase into a savings plan. If you're getting a $5,000 raise before taxes, and your after-tax income increases by $3,000, then I want you to commit to saving $1,500 more per year as soon as that raise takes effect. That's only $57.69 from each bi-weekly paycheque.

Humour me and try it for a few months. If you can stomach it, and I know you can, you'll be on your way to the financial equivalent of six-pack abs.


Invested in the following ways, $100 per month could grow to:

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High-interest savings account @ 2% Interest

1 Year = $1,213

5 Years = $6,312

10 Years = $13,282

20 Years = $29,472

Balanced portfolio @ 5% rate of return

1 Year = $1,232

5 Years = $6,809

10 Years = $15,499

20 Years = $40,746

Aggressive portfolio @ 7% rate of return

1 Year = $1,245

5 Years = $7,160

10 Years = $17,202

20 Years = $51,041

This is for demonstrative purposes only. It assumes linear growth. Ask your financial adviser about the effects of market volatility and sequence of returns when making financial projections.

Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is .

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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