The Marginal Benefits of Increased Income

I’ve written quite a few posts about frugality in the short time I’ve been blogging here. But when it comes to saving, there’s a lot to be said for increasing your income. Whether that’s through a promotion, changing job, or just renting a room out on Airbnb, a bit of extra cash coming in can have a disproportionate effect on your savings.

What I’m not talking about are the little inflationary pay rises you get every year of around 2%. Those aren’t going to have much effect because your expenses are going to go up by around the same amount each year (unless you can find more ways to cut back). This is about actual boosts to your income. But they don’t have to be large to have a large impact.

Say, for example, you’re earning $800 a week after tax, and your expenses each week are $720. So you’re saving 10% of your income or $80 a week. Now let’s say you get a promotion and suddenly you’re on $880 a week after tax. That’s only a 10% increase in income. But now after your expenses you’re saving $160 a week. That 10% increase in income has yielded a doubling in your weekly savings.

That means whatever you were saving for, be it a holiday, house deposit or retirement, you’re going to get there twice as fast! Not bad for what’s really a fairly small boost to your income. Now if you can rent out your spare room for $80 a night once a week, you’ve tripled your savings!

It’s important to make sure you’re using the right anchor when weighing up decisions about increasing income. In the context of your $800 a week take home pay, a little bit of Airbnb income on the side doesn’t look like it’ll make a huge difference. But in the context of the $80 a week you’re saving, it’s a massive difference to your financial situation.

So whether you’re paying off debt, socking money away for a rainy day, or saving for a future goal, make sure you’re taking into account the marginal benefits of increased income.

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