Throughout our working lives, we will get pay increases. Whether it is just a cost of living increase or a large one due to a promotion or a new job, we can all expect to earn more as we get older. But what do we do with this extra money as we get it so we can put it to good use?
One of the fundamentals of achieving financial independence is being frugal; that is spending less than you ear and saving the rest. If you are happy with your lifestyle already, having more money does not mean that you will necessarily going to have any even better life. It is better investing this extra money so you have more of it in the future when you want money but don’t want to have to work for it anymore.
The madness of The Celtic Tiger saw banks giving out 40 year mortgages and a lot of people have mortgages that won’t be paid off until they are 70, even though they do not intend to work that long. That means that the debt will have to be paid off before then. As I wrote before, carrying debt into retirement is the biggest mistake retirees can make; your income decreases but your debt doesn’t.
If you increase your mortgage repayments by the same amount as a payrise, you can knock decades off your mortgage. If you took out a €500,000 mortgage, payable over 40 years at 3.5%, your monthly repayments would be €1,937. If you increased those repayments by 5% each year, you would knock 20 years off your mortgage!!
If you have a pension, the contributions should increase by at least the same amount as your payrise. Pensions are expensive and people tend to be put off when they see how much they are supposed to save to get the maximum pension allowed. And what do they do? They don’t start one at all and the problem isn’t fixed.
Pensions are a very long term investment so get it started at an amount you can afford and every time you get a pay rise, increase the contribution. If a 40 year old starts contributing €500 a month to a pension, increasing it by 5% each year, they will be contributing €1,693 at the end. This bit by bit increase makes the contributions affordable. And it has a huge effect on the size of your pension fund. If you left it at €500 a month, you could expect a pension fund of €256,000 at retirement. If you increased you contributions, your expected fund would be €332,600, 30% more.
There’s no point in being too regimented about the allocation of your payrise without getting some enjoyment from it too, especially if it is a significant payrise. Enjoy it a bit. That may be going on a holiday before you start saving the extra funds or allocating the extra funds on a monthly basis to something else.
What you do not want is to look back on what you spent your money on and have nothing to show for it.
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