There are few feelings in life any better than the feeling you get when you’ve just been told you’re getting a nice raise. It not only means more money but it’s also about self-worth – your company just confirmed the fact that you’re a valuable employee. We can still remember how we felt the day we got our biggest raise ever. We literally wanted to dance down the hall, shouting “Hallelujah!”
If you’re not careful
The mistake many people make when receiving a raise is that they immediately adjust their spending to their new salaries. This has been called lifestyle creep. For example, if you’ve been driving an eight–year-old SUV you might be tempted to use your raise to move up to a newer model. Or you might decide to boost your spending in several categories like clothing, recreation and entertainment. What this amounts to is if you’re not careful the money you received as a result of your raise can basically evaporate in just a few months and you could end wondering where it went.
A better alternative
A better alternative than just allowing lifestyle creep is to sit down and think about your goals. What’s really important to you? Is it travel, camping, good food and exercise or your kids? Make a list of these specific items and then budget for them using your new money. That way instead of the money just disappearing into your everyday living expenses you’ll be using it to achieve both your personal and financial goals.
Know your Achilles’ heel
Many people, and especially young people, break their budgets on going out. If your number one vice or Achilles’ heel is hot new restaurants, bars, clubbing or concerts there are a few things you could do to make sure you don’t increase your entertainment spending, which would eat up that raise. For example, if your biggest vice is eating out, you could invite your friends over for a DIY cooking night or potluck supper. Do you just love festivals and concerts? Instead of buying tickets for them why not organize a bike ride? The net/net is that you will need to be clear about your spending goals and find ways to encourage your friends to accommodate them.
Pay down debt
There is just no better way to get a return on your money than paying down debt as your return will be equal to the interest rate you’re paying, which could be 15% or even higher. If you’re carrying credit card debt use that salary increase to pay it off. Start by focusing on paying off the card with the highest interest rate while making at least the minimum payments on your other credit card debts. Then, when you have that highest-interest credit card debt paid off there are few things in life there are a few things any better. When you just been told you’re getting a three only means more money but it’s also about self-worth just move on to the one with the next highest rate and so on.
Increase the contributions to your retirement plan
Whenever you get a salary bump there’s the opportunity to save more money for retirement. In fact, that should be one of the first things you focus on. Your ultimate goal should be to save 15% of what you earn for retirement. If you’re not at that level yet, don’t panic. Just increase your retirement savings by as much as your new salary will allow. The key here is to automate your savings so that the money is automatically subtracted from your paycheck and deposited into to your company’s 401(k) or your IRA. Do this and pretty soon you won’t even miss the money.
Get the most emotional bang out of your raise
If you have no interest in saddling yourself with a new car payment, a new house or apartment then don’t. Determine your most important goal and then use the new money to achieve it – whether it’s spending a month in Thailand or hiking the Appalachian Trail. When you budget for things that don’t match your goals or that don’t bring you joy, you could end up cheating on your budget and feeling bad about yourself. The trick here is to understand what drives you as a person and then use that raise to achieve it.
Create an emergency fund
There are financial experts that say you should have an emergency fund the equivalent of six months’ living expenses. However, that can be a very tall order. If you calculate your living expenses to be $2000 a month you’d need to have a $12,000 emergency fund. Instead of trying for this, which could be mission impossible, try to create an emergency fund of at least $2000. While that won’t be the six month’s cushion you should work for over time, a couple of thousand dollars would help you avoid we can still remember how we felt the day we got our biggest reason ever really wanted to dance down the hall shouting Hill Lilia mistake many people make when receiving erases it they merely adjust their spending to their new salary was have been called lifestyle creep example if you’ve been driving me your list will be you might be tempted to use your race to up to this amounts to is if you’re not careful a bunch of smaller financial disasters like your car breaking down or a medical emergency.