Top Reasons A 3% Merit Won’t Change Your Budget

So you’re banking on an annual merit or Cost of Living Adjustment (CoLA) and expecting extra money in your budget. Not so fast. You may feel lucky to get a 3% increase this year during COVID times and we should all appreciate remaining employed. But, we need to be prepared for other areas of our life where costs increase. Here are just a few reasons why a 3% bump won’t do much for your budget. 

Childcare: Our daycare usually imposes a 3-4% increase annually, which makes sense because if we get annual raises, so should the staff and teachers. We have twins in preschool so our 3% could be about $125 more a month.

Public School System: Some of your property taxes are going toward town/city staff salaries, the public school system, roads, and resources for the aging. All of those groups are staffed and of course, teachers are going to get a bump too as we would, but especially since some are in the union. Keep this in mind. 

• If you are house hunting, check out the town/city website to see the tax rate per $1,000 of assessed home value. That will give you an idea of taxes for the houses you are shopping. Then assume a 3% annual increase, but potentially more if some schools need construction or even more than 3% if overcrowding is an issue.
• The more industry a town has, the lower the residential property taxes. But if you are looking at small towns without much retail or other business, know that most of the annual cost increases will fall on residents. 

Utilities: Can I say that no matter what I do, my electric bill always rises? I’m convinced that when I used fewer KwH, the cost to “service” or “provide” the electricity increase. Bottom line: these utility companies usually have the market wherever you live and you have to assume these costs will be static or increase with inflation. 

Insurance: As with property taxes, your town/city will likely assess your home every few years. When that happens, that home insurance price will likely increase. They may claim that based on local comps, the cost to rebuild your house has gone up. Shop around a few months before your policy cycles. 

Commodities: Heating oil, milk, bread, meat – these are all commodities. These are items that no matter what, we are going to need, ie the base of Maslow’s Hierarchy of Needs. While grocery stores margins may sit well below 5% in most places, the factory farms are doing just fine.

If money is tight, shop around. I just got a BJ’s membership for $25 and the cost of milk is $2 less than at my small town grocer. I do want to shop locally more and support small businesses. But, I try to balance shopping locally and sticking to our food budget. One option is to shop every two weeks, one time at BJ’s, Walmart or Costco, and another time at a local, independently owned chain. 

The bottom line here is that the 3% increase you expect to get will go fast. If you expect to may another $100/month after taxes, you may only end up with an extra $25 each month. That’s enough to throw at a High Yield Savings Account for Sinking Funds, or your 401K. But don’t change your lifestyle. Finally, keep in mind one day we’ll have to go back to our offices and that will mean train and subway rides and more driving, ie the return of commute costs.