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.
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.
[tweetthis]Getting started on your own is expensive, but it is NOT an excuse to spend more than you can afford #personalfinance[/tweetthis]
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.
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?