When was the last time you got a pay raise?
Did you handle it well?
After a few months did it even feel like you had gotten a raise?
No matter if a raise was scheduled, or a surprise, if it was a $100 month raise or a $2,000 month raise it still feels good to be recognized with a pay increase. However, often we can end up spending more on lifestyle than our raise if we are not careful. If for example after getting a $300 month raise, you go out and sign up for a brand new car payment of $385, in real term you did not receive a raise; you took in essence a pay cut! To help avoid that situation in the future below are three tips for budgeting a raise
Stick to your plan
Do you have a plan with your money each month? If so then getting a raise doesn’t change the plan one bit. If you are paying off debt then, putting the raise completely on your debt will increase the speed of your debt payoff. If you are trying to play catchup with retirement saving or college funding then a raise will go a long way towards getting caught up. ! If you are already out of debt except your mortgage, you could even start to pay extra monthly on your mortgage and retire that debt early.
Often it is tempting to change a plan because of an increase in income. But a plan is a plan so having more money to budget each month shouldn’t change your plan, it should just speed up the plan.
Avoid Lifestyle inflation
I got to be honest, when I get a raise, my first inclination is to dream of what my wife and I can buy with it. This is right in line with the mindset of our culture today that preaches instant gratification, not patience.
Now don’t hear me say that increasing your lifestyle is wrong. Spending more on lifestyle is more than OK, but it all depends on where we are at in our finances.
A lot of times we get ourselves into trouble by increasing our lifestyle parallel to our income and we push aside getting out of debt or saving. By putting 100% of a raise into increased lifestyle our budget and finances are pushed to the maximum which leaves no margin for life.
Instead of an increased lifestyle being the first thing we do with a raise, often it should be the last thing we do after taking care of debt, giving, saving, and investing.
Particularly if a raise is a small monthly amount, it is easy to overlook the option of saving. However after a few small raises pass by our emergency fund could easily be out of sync.
After each raise we receive, I like to look at our emergency fund and determine if it truly represents three to six months’ worth of expenses. If it does and we are comfortable with the amount in the fund we are good.
If it doesn’t then we need to step back and beef up our savings a little bit to reflect the increase in our monthly expenses.
But savings isn’t just for emergencies. It can also represent saving for a replacement for our vehicle or other big purchases. Using a raise to increase savings for big expenses coming up is a great way to save money without having to cut back on spending.
Also when we talk about “saving” we’re also talking about investing. The recommendation we make is to put away 15% of your income into retirement. However most people are not there yet.
A good way to increase the amount that we’re saving for retirement is to take a raise and up percentage a few points. If you are making $5,000 a month and are contributing 6% ($300/mo) of your pay into retirement and you get a raise to $5,500 a month, why not up your contribution to 8%. That way you will be putting $440/mo into retirement with the $140/mo increase coming entirely from you raise. You will not miss the money a bit and with the power of compound interest your balance will grow even further.
So how do you budget a raise? I would love to hear how you go about budgeting a raise.