Why a salary increase is never enough

July 31, 2014 by Ugodre Obi-Chukwu 

   

 

Ugodre Obi-Chukwu

Soma lived in a N400, 000 a year rental property when his salary was N3.6m per annum. He also owned a car worth about N1.2m. He finally switched jobs for a higher pay and now earned N6m per annum. With the eighty per cent rise in his salary his lifestyle just had to change. He moved to a N1.2m per annum apartment and bought a car worth N2.5m. After three months he realised he was always broke and in fact in a far worse situation than he was when he earned lower and thought he needed to switch jobs again.

Being in paid employment has a way of making one feel short changed all the time as you discover no matter how much you earn it is almost not enough. You have plans of what you could do with a higher salary and then when your salary is raised nothing changes. Mid way into the month your bank account is already looking thin and you just can’t wait till the end of the month again. It’s a vicious cycle.

I have thought about this throughout my working experience and wondered why things were always this way. Why do I ask for a salary raise and when it does come, I want another increment sooner rather than later. Just how much is enough for me at any given time and how can I make sure each salary increase puts me in a much better situation financially. I soon figured out this were the critical issues I needed to focus on.

My lifestyle – When we earn higher pay there is this innate tendency to somehow change the way we live without appreciating the financial consequence. You just feel you have moved up in class and as such your lifestyle must be a reflection of your salary. Whilst this is a good feeling, the problem is that it can be difficult to measure just how much that extra lifestyle should cost you. An increase in your lifestyle should be commensurate with how much of a lifestyle you can actually afford. You therefore have to think in terms of percentages. For example, at N3.6m per annum Soma’s house rent chalked off about eleven per cent of his salary. When his salary now increased to N6m per annum, his rent sliced off twenty per cent of his salary.

If other expenses increased this way, he will soon be broke. His expense must rise proportionately to his salary.

My loans – An increase in salary also exposes you to all sort of financial products that make you want to spend more rather than less. You can now get a car loan, housing loan or even afford an expensive ceremony. As explained above, you have to live within the percentages. If you have somehow lived within a debt service to income percentage of twenty per cent then the only time you get the benefit of a higher salary is to either keep the percentages the same or reduce it. For example, if your salary is N2m per annum and a loan deduction was N400, 000 per annum then your debt service to income percentage will be twenty per cent. Therefore, a salary increase to N3m per annum should attract loan deduction of N600, 000 per annum (which is an extra N200, 000) for you to maintain the same percentage. Deciding to increase or decrease the percentages will off course depend on other things that lay claim to your salary. If one goes up something else must go down.

My taxes, pension and other contributions – The new tax law has brought the often-maligned Pay As You Earn to the front burner. The tax law is now simplistic with little loophole for employers to exploit. Considering that the PAYE system that you earn is a progressive form of taxation, you basically pay more taxes as your salary increases. This also affects deductions such as pension and contributions such as the NHF. Before you seek a salary increase you must factor in these charges to your salary to ensure your statutory take home pay is up to your target. In fact, this must be done before you apply the percentages mentioned above.

My responsibilities – A salary increase also brings about more responsibilities. In fact, up to ten per cent of most our salary is spent on taking care of extended families, friends and other dependents. An easy way to control this expense is to ensure word of your newfound salary is kept under the lid. People will demand for more if they know you earn more.

My savings and investment – If there is any portion of your new salary that needs a percentage increase, then it is this category. In fact, it is often advisable to deduct this from source leaving behind what you can use to fund other expenses. A disciplined savings and investing culture gives you peace of mind especially during a cash crunch. But remember when this increases the percentage for the others will change proportionately.

Finally, the impact of a salary increase can only be felt when at the end of the day you have an extra income in the bank. Whilst a change is lifestyle is good your ultimate goal should be how much comparative increase in cash you have in the bank. After all cash is king!