The salary to expense trap keeps many salary earners in perpetual debt and misery. This article explains how you can manage your salary to avoid the trap.
Every salary earner knows that no matter how much you earn, it is hardly enough to meet your daily needs. Saving portions of your monthly salary is desirable but hard to achieve. The Salary-Expense Trap is a harmful habit. It makes life difficult for employed people and prevents them from developing a sustainable saving and investment culture. This piece explains the nature of the Salary-Expense Trap. It also proposes an alternative approach to manage your salary. Most importantly, it suggests how to escape from the expense trap and avoid debt.
To avoid the Salary to Expense Trap: Be disciplined and committed.
The culture of saving is a rare attribute that requires discipline and commitment. Every employed person looks forward to enhanced salary earnings. With a salary increase, many believe that they will attend to pressing needs and have some extra to save. Unfortunately, this rarely happens because soon after receiving increased pay packages, our commitments increase. As a result, the urge for an improved lifestyle rises to the new salary packages. Salary earners, therefore, require discipline and commitment to follow through with any savings and investment plan they have set for themselves.
Salary earners always struggle to answer two major questions. First, they seek to know why it is difficult to save? Second, they look for answers on how to develop a lasting savings habit. These questions may seem simple. However, answering them requires a strategic analysis of some issues inherent in how we use or spend our salaries.
MODELS FOR SAVING AND INVESTING SALARY INCOMES
The Salary to Expense Model.
The Salary to Expense Trap outlines the dilemma faced by salary earners in managing their salary incomes. It also explains the complex relationships among four key factors: salary, consumption, expenditure and savings. Figure 1 illustrates this relationship. The concept shows the popular approach to savings adopted by many employed persons and why it is hard to develop a sustainable savings culture.
The blue and red arrows point to the direction of flow. The blue arrow indicates a positive impact on the factor in the rectangular box. Contrarily, the red arrow indicates a negative effect on the item in the rectangular box.
Figure 1. Salary to Expense Model
The primary source of income for paid employees is their monthly salaries. Salary earners usually spend their monies on consumption, personal expenses, and savings. Economic theory indicates that income is the primary determinant of our level of consumption and savings. Thus, with higher income, people tend to develop a greater inclination to consume or save. As we know, a salary increase is usually hard to achieve. On the other hand, our consumption levels often exceed our earning capacity.
It is a paradox that a salary raise, for many employed people, often leads to a rise in expenditure. Unfortunately, this does not always result in a proportionate increase in savings. Therefore, many who earn higher salaries often find themselves as financially broke as those who earn less. Those who receive higher wages tend to spend more of their incomes to sustain their bogus lifestyles. Thus, salary earners hardly remember that sudden and unexpected layoffs are critical aspects of organizational life.
And here’s “How to develop the right attitude to survive layoffs“.
The Vicious Cycle of Consumption, Expenditure and Debts
Even with improved pay packages, the challenges for salary earners are many. Unfortunately, without other sources of income, an increase in consumption increases their expenses, thus drawing them into new debts. To manage their expenses and pay off debts, salary earners usually draw from their savings. Hence, they are often unable to reach their savings targets. Thus, every month salary earners find themselves trapped in the loops marked by the red arrows (Loops 1 and 2).
These loops are similar to an unfriendly environment characterized by an increasing appetite for consumption, a myriad of expenses, and an ever-dwindling savings stock. The result is usually an overwhelming debt accumulation.
How to develop a sustainable savings culture
It is possible to break free from the Salary-Expense Trap and develop a lasting savings habit. So, this write-up suggests a different approach to manage your income. This approach is called The Salary to Investment Model.
The Salary to Investment Model
The Salary to Investment Model incorporates investment as the primary outlet for salary incomes. Unlike the Salary to Expense Model illustrated above, the Salary to Investment Model channels the bulk of an employee’s salary into investment and savings.
To be effective, this model requires that money in savings accounts be seen as money in transit, accumulated primarily for funding prospective investments. It is unproductive to keep funds idle in a savings account just for the sake of having savings. Debts and expenses will reduce such savings sooner than we expect.
A fruitful investment generates returns in the form of profit which helps to fund expenses. Furthermore, it removes the risk of spending from your accumulated savings. Therefore, to create wealth and a lasting future, salary earners must learn to reduce their consumption and expenses. These are primary sources of waste.
The Salary to Investment Model makes it easier to generate profits from our wages. It discourages the use of salary incomes to fund expenses and debts, as illustrated in figure 1. Furthermore, the model creates an opportunity to generate new funds that can be reinvested into the savings-investment-profit-wealth creation-savings cycle, as shown in figure 2. Most importantly, it increases our stock of savings rather than reduce it, as was the case with the Salary to Expense Model.
Figure 2. Salary to Investment Model
Avoid investment scams: Look before you leap.
The success of the Salary to Investment Model lies in the ability to identify and utilize credible investment outlets. We recognize the difficulty in determining credible investment outlets. Many investment outlets are fake and may instead wipe out your life savings. Therefore, it is necessary to seek professional advice before investing money in any business or investment outlet.
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