The Good And Bad Of Spending Your Salary Upfront

As a salary earner its not abnormal to look forward to pay day just a week after payday. Questions like how did I just finish this money pops up as numerous recollection of what went down basically worsens the situation. In some cases, your salary is already spent before it is even paid.  Spending your salary upfront has its advantages and disadvantages depending on how its appropriated. To understand the impact of this here are some examples of what can make you spend your salary before it is received;

For starters about 20% of your salary is deducted before it is even paid to you. At least 10% is deducted as taxes, another 3-5% is deducted as pension and another 2% as contributions to the National Housing Fund. Deductions from other sources such as upfront deductions, loans, I.O.U’s, thrifts etc mostly get taken from your salary before it is paid as well. So for a guy who earns N100,000 a month in average salary, N20,000 is deducted from his pay before he’s even pocketed.

Next up are reductions to your salaried that are not statutory. They are mostly done on your instructions rather than by some law or statutory obligations. Here are some of them;

Upfront Salary –  Despite the passage of the new Tenancy Law in Lagos, it is difficult to find a landlord who is willing to collect rent monthly. Most still receive rent annually at the minimum even though all salary earners earn their buck monthly. Even simple things like a car purchase or payment for furniture etc all require some form of bulk payment if you are to finance it without a bank loan. For most people, the easiest way to fund some of these things is via an upfront payment of salary. This system is mostly practiced in Nigerian banking industry and has gradually moved to other industries. It basically involves your company paying you a large chunk of your annual salary at the beginning of the year and then amortizing that chunk monthly until it is fully paid off. Upfront salary is great provided the money received is put to proper use. That brings me to the bad;

I knew someone who used his upfront salary for a family vacation which he actually didn’t need. Not that family vacations are not good, but what is the point spending your salary on a vacation when you have other pressing needs like rent payment or your children’s school fees. I mostly fund the bulk of my vacation expense from my leave allowance and salary for the month preceding my vacation.

Direct Debits – Direct debits are standing instructions given to a financial institution to deduct an cash from your salary on behalf of a utility company or any organization or persons that provide you services. For example, it could be for payments of DSTV bills, Nepa bills, Water rates, toll fares etc. Because these are essential services that you mostly depend on, you do not want it fallen due at a period in the month when cash is very little. To therefore ensure regular service it is often advisable to place your salary on a direct debit. However, direct debits due to their frequency of occurrence, should only be for essential services which you can afford and cannot do without on a daily basis. Because of their nature, its major disadvantage is using it for expenses that feed on your habit or insatiable desires. Some people have a direct charge on their salaries to pay for porn movies or even to pay for debts owed to clubs and bars.

Standing Order – Another way to spend your salary upfront is to place a standing order on you account giving your bank instructions to transfer monies from your account to another beneficiary. Unlike direct debits, it is mostly lump sums and are not for utility bills. Standing orders are good provided  it is used to fund things of immense value to you which you do not wish to tamper with. It is a form of discipline in the sense that by giving your bank the instruction you do not have to worry about the indecision that may arise every time you have to write a cheque for those payments. Standing Orders should be used for things like saving for your children, putting money aside towards a project, investing in a mutual fund, investing directly in shares on a monthly basis. It should not be a conduit for funding extravagant lifestyles which do no add any much value to you.

Contributory Schemes – Most organisations have several types of staff contributory schemes such as “esusu” which involves constant contribution of a certain amount of money by interested participants for a duration of time. Each participant has an opportunity to receive the full contribution once in the cycle. To ensure that everyone contributes, a charge is usually placed on the staff salary at the end of the month. For those who participate in such schemes it provides them an opportunity to get a lot of money upfront which can be used for important projects. Another similar scheme is an investment club. Members of the club contribute cash monthly or quarterly and use the amount contributed to invest in shares, bonds, funds etc. It is important you ensure to join these schemes for only productive reasons. It is wrong to join them because everyone around you does.

Buying things from Friends and Family– In Nigeria, it is not uncommon or workers to buy and sell things to each other. Its a form of earning extra income for those who sell and owning items before payments for those who buy. For those who buy its no different from spending your salary upfront. People use it to buy dresses, jewelry, accessories etc Whilst this is a good idea it is very susceptible to amassing debt. There are a lot of people in work places who are notorious for owning money and surely you do not want to be seen as such.