The 4% Raise Trap: Why More Workers Are Taking Extra Jobs
Getting a raise should make it easier to get ahead, but for many Americans, higher pay is colliding with higher costs for necessities like housing, groceries, insurance and transportation, leaving little extra in the monthly budget.
That squeeze helps explain why earning more at a main job may still lead some workers to look for a second paycheck. With that in mind, let's take a deeper dive.
Even a 4% Raise Doesn't Mean More Buying Power
A raise may increase a person’s actual income, but according to Michael McAuliffe, president and founder of the nonprofit agency Family Credit Management, “Raises commonly given out can’t keep up the pace with these higher prices, so most people are feeling the pain every month.”
Inflation has even left many living paycheck to paycheck, even those who are earning “meaningfully more than they were a year ago," he explained.
Eric Croak, a certified financial planner (CFP) and president of Croak Capital, offered a concrete illustration: A worker earning $60,000 who gets a 4% raise receives an additional $2,400 per year. But if that worker’s personal expenses rise 6%, they’ve effectively lost $1,200 in purchasing power.
“Personal inflation almost invariably exceeds the official figures due to the disproportional increases among goods and services, which means rent, insurance and groceries rising faster than the overall CPI (consumer price index),” Croak said.
Essential Expenses Are Eating Up More of the Paycheck
The biggest expenses are, unfortunately, coming from necessities, according to Chris Leonard, wealth manager at Cornerstone Financial Services. In the current inflationary environment, some of the top expenses putting the most strain on household budgets are housing, groceries, transportation costs and the rising cost of healthcare.
“Average wage increases have struggled to keep pace with the rising cost of living for most of the workforce," he said.
McAuliffe cited the Federal Reserve’s Survey of Housing, Economics and Decision-Making (SHED) survey, noting that only 41% of adults said they always or often have money left over at the end of the month, and more than one-third could not cover a $400 emergency expense.
When a Second Job Can Actually Help
The experts generally agree that a second job works best as a temporary tool tied to a specific financial goal, such as eliminating high-interest debt or getting through a short-term financial crunch, rather than as a permanent solution to an unaffordable budget.
“The opportunity cost of a permanent second job begins to mount with each passing month due to the increased risk to one's health and family life,” McAuliffe said.
Make Sure the Second Paycheck Is Actually Worth It
More gross income doesn't automatically translate into much more disposable income, Croak warned. He also cautioned that workers with multiple W-2 jobs can wind up under-withholding taxes, and the self-employed side income can bring self-employment taxes. Those with second jobs should be sure to withhold extra funds or pay quarterly estimated payments to avoid this.
Leonard agreed, adding that before taking a second job, it’s important to run a detailed income analysis to ensure your net take home pay offsets the task of taking on additional work.
Before Working More Hours, Look for Savings Elsewhere
A second job isn't the only way to restore breathing room. Croak tells his clients to do a “personal inflation audit” to identify exactly which expenses have increased, then shop around, negotiate rates or substitute cheaper products before committing more hours to work.
It's also important to resist lifestyle creep after a raise, McAuliffe said.
“Anytime you get a raise, set up your savings to automatically withdraw whatever the extra is from your new increase,” McAuliffe said.
A second job can help close the gap when a raise doesn't keep up with rising expenses, but the goal should solve a problem rather than become a permanent requirement just to stay afloat.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.