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Wednesday, September 24, 2014

Cents and Sense: Managing Money after Salary Raise or Increased Revenue

More Money, More Problems?
In a past CCM Weekend Edition, we explored how more productivity can be achieved in the workplace, so that a job meets other needs in addition to being a source of income. Management and employers can do this by meeting the emotional needs of employees. In effect, things that make employees loyal and increase productivity such as promotions, bonuses and salary raises – even a new job, all bring in more income.
Consequently, what value judgements should one make when there is a significant increase in income? Unsound personal finance management can easily negate any gains that more money promises.
First off, money doesn't make life better. More money only presents more choices. In 2010, Penelope Trunk of CBS Moneywatch published an article with a bold claim that a job that brings in more money should not be used as a means to achieving happiness. In the workplace, it is autonomy, control and fellowship that make people happy.

Lifestyle Changes
Human beings are always trying to live a better life. Many however, squander opportunity and unduly indulge when faced with higher incomes. How can this be forestalled? Anthony Mugo, a Nairobi based property developer and consultant says the following about how much of a lifestyle change one should make following a salary raise or more revenue:
“A better car or a new shirt - that is the reality of such a situation. Ideally however, such money should be invested.” 
Anthony goes ahead to illustrate using a Biblical story. “Someone with a long-term finance plan will invariably see gaps that could be filled using this extra income. Just like the seven years of plenty offered to Joseph and Egypt, any period of plenty is seasonal. A good rule of thumb is to be guided by long term objectives.”

Joe Barasa, a freelance digital artist, echoes that sentiment, albeit with emphasis on lifestyle. “I am content with my life, so not much change. With a dream of owning my own place, an increase in income would go towards settling on a small farm.  Needless lifestyle changes, such as hanging out with those who spend more is a big NO. So is developing an appetite for expensive habits, such as club membership.”

On paper, this is very good advice. The question that begs asking is: How can one live better without a corresponding increase in spending?
“Nobody is satisfied with the way things currently are, a higher level is ever alluring.” says Anthony. “Without very clear goals, one can get distracted. Care should be taken to help cushion against unpredictable future downturns.” Appreciating what one already has, and staying focused on what is important, not just urgent is essential.

“Comparing oneself to peers, former classmates or submitting to other people's expectations are things I avoid,” says Joe. “Being content obviates wasteful spending.”

The Role of Management
With human frailty in mind, should those in positions of influence be concerned about how people spend their money? “Management should not care.” Anthony asserts. He then goes on. “But I do. My way of doing it is that before hiring anyone, I evaluate if his or her personal goals are congruent with my organization's. In my experience, overlooking this results in high employee turnover. Employees become viable upon understanding their contribution to the employer's business plan, and how they'll get compensated for that.”

Anthony proceeds to explain how just paying adequate salary with no regard to an employee's spending habits is ultimately costly and harmful to employers.
“Employees with poor spending habits are bad for business. They normally have low morale and seldom focus on their roles.  They also spend an inordinate amount of their personal time moonlighting on locums and side hustles instead of concentrating their energies in the organization.”

Joe avers that management and employers should indeed care. “This contributes to the general welfare of the employee. Ultimately, it is good for the company. The onus however, is on employees to use their salaries as they please.”

How then, can this be done? On one side, employers and management can be accused of gross negligence and having no concern for the welfare of employees. As outlined above, an employee's spending habits have an effect on the company. Thus said, management should be interested.
Otherwise, employers and management risk being accused of overstepping a mandate that is assumed to end once an employee is compensated for hours and skills rendered to the company. Being involved in how an employee uses his or her hard-earned money is exercising undue influence. This is both unethical and illegal.
“It is a tight rope.”  says Anthony. “One can only recommend. It is akin to advising that employees tithe or donate to organizations such as the Rotary.”

Joe suggests one way management can navigate these murky waters. “Employers should limit themselves to educating and advising.”  This ensures the employee is left with the choice to make an independent decision, albeit an informed one.
“Management should foster an enabling environment. This is most easily done by creating opportunities that may be hard to come any other way, such as company-backed SACCOs, savings and investment programs.”

Doing the Needful
All said and done, what would be the best things to do following a new job that pays better, a salary raise, or more revenue in business?
“I'd say save and invest more.”  Joe then goes ahead with personal decisions that should carry more weight regardless of income. “Try not to develop an expensive lifestyle. Learn to be content. Do not let your purchasing decisions be influenced by marketing, fads and advertising.” Essentially, it boils down to having a personal stand, and the ability to wisely separate needs from wants.

“Items that enhance productivity in the workplace should be prioritized.” says Anthony. The business should be enhanced first, not the owners or directors jumping sans looking by taking vacations to exclusive islands or buying luxury personal items. “It is more prudent to pamper the business, not the person.” If anything, additional spending should benefit both employer and employee. “Bonuses keep employees motivated” Anthony adds.

In sum, cents and sense need not be mutually exclusive, especially when big money comes in. And this holds true both for small and large amounts of money, which is in line with the English saying that 'if one takes care of the pennies, the pounds will take care of themselves.'
In the book How to Win in the Coming Jua Kali Boom, the shilling cycle in business involves buying, processing, transporting and selling. Between selling and restarting the cycle through buying, there is an important checkpoint called 'manage money.'
Checkpoint 'moto' is a critical step where money mostly hemorrhages from the cycle. It is at this point that needless spending happens, profits are squandered, business proceeds are spent in bars and casinos .

Many businesses are wrecked at this point. So are the personal finances of many salaried individuals. The temptation to succumb to expensive habits is most alluring following a salary raise or higher income in business. Care should therefore be taken to make prudent decisions that have far reaching effects for both employees and employers.