How to Keep Your Raise From Disappearing

How to Keep Your Raise From Disappearing

Your hard work has paid off. Literally.

Getting a raise is an exciting accomplishment! And deserved. Raises are important for motivation and validation but also for practicality. In some instances, getting a raise is to keep up with inflation and the rising cost of living, but other times a raise comes with a new title, job or more responsibilities. 

In both cases, utilizing that bigger paycheck is important. It can help you accomplish long term goals, like paying off student loan debt, credit cards, and saving for retirement. Depending on the amount of your raise, you may have more disposable income, but even then it’s easy for time to pass and suddenly you realize that extra money isn’t going as far as you’d hoped.

A little bit of planning and organization can help you avoid the pitfalls of increasing your income. Here are a few steps you can take when your paycheck grows and you want to make the most of it.

Update your budget

A good first step after a raise is to revisit your budget or create one if you haven’t already. A budget should include items that are non-negotiable (like rent, bills, credit cards and other recurring payments) and also more fluid spending (entertainment, shopping, groceries and eating out). 

Getting a general sense of how you spend your money is a huge step in getting it to go further and prevent you from eating through that new paycheck. 

Build your savings or investments into your budget as well. This will prevent you from spending it or allocating it somewhere else (which can happen unknowingly if you’re not careful). A rule of thumb is to save 10-15% of your paycheck. If you’re making more money that amount will also grow. For example, a $400 raise per paycheck will mean that you’ll want to put away about $40 more. 

While it’s tempting to sidestep increasing your savings, it’s an important safety net. Financial experts suggest that people save somewhere between three and six months of living expenses in case of an emergency. Having a budget will help you determine that monthly amount so you can work toward an accurate goal. 

Watch for lifestyle creep 

Having more money in your bank account can be tempting! Almost immediately you find yourself eating out more often, filling your online shopping cart more frequently or increasing expenses on items you were once more conscious about. 

Personal finance experts call it “lifestyle creep” and it’s basically the phenomenon that explains more spending when you have access to more money. It may not be obvious at first, but eventually you’ll notice that the raise you got doesn’t seem to feel as extra as it once did. 

Part of the way to prevent this lifestyle creep is to keep an eye on spending, even if you have a budget. Writer, artist and financial planner Paco de Leon tells National Public Radio that there are even ways to trick your brain into preventing lifestyle creep while still enjoying the experiences where you tend to spend money.

“Put the items you desire on a list. Then, after a predetermined time (like a week or a month), if you still want that thing, go ahead and buy it,” de Leon advises. “You can even build the concept of shopping off your buy list into your life so you have items and experiences to look forward to.”

Slowing down the thought process of your purchases will help you analyze whether it’s something you really want or need and you get the added bonus of being able to browse.

Make your money work for you

A raise is a good opportunity to revisit how your money is working for you. While you’ll undoubtedly want to save more in case of an emergency, it’s also a good idea to reassess investments and/or retirement accounts that will serve you much later in life.

If your employer contributes to an IRA or 401(k) – both popular options for retirement savings – then this is a great way to get ahead! If you contribute more, their match may also be higher (this depends on each workplace's guidelines and how much you’re already contributing). 

An added bonus is that this money is typically deducted from your paycheck automatically. There’s no extra work on your end and you won’t be tempted to put it in other places in your budget. Talking to a human resources representative at your company or organization is a good place to start. 

Having more access to more money can also mean that you’re able to diversify your investments. Even adding $50 to an additional IRA account that’s invested can be helpful in creating a more stable future for yourself. Talking to a financial adviser can help you make a solid plan to ensure that you’re using that raise wisely.

Make room to enjoy it

It wouldn’t be much of a raise if you didn’t get to enjoy it. 

Ramit Sethi, author of the New York Times best-seller “I Will Teach You To Be Rich,” knows how difficult it can be to build wealth and has made an entire career out of helping young adults make the most out of their income. He’s a proponent of adding “guilt free” spending into what he calls a “conscious spending plan,” which he describes for CNBC as “a strategy that forces you to look to the future while also allowing you to spend extravagantly on the things you love — as long as you cut costs mercilessly on the things you don’t love.”

If budgets have been hard for you to follow or they seem to fall apart after a few weeks or months, this may be a better path forward. 

Sethi breaks down the plan into four parts: 

  1. Fixed costs: Rent, groceries, student loans, utilities, etc. (50% to 60% of your income)
  2. Long-term investments: 401(k), Roth IRA, etc. (10% of your income)
  3. Savings goals: Holiday gifts, vacations, down payment on a home, etc. (5% to 10% of your income)
  4. Guilt-free spending: Dining out, movies, shopping, etc. (20% to 35% of your income)

“By allocating your money this way, you can make sure you have enough to pay off all your responsibilities first. Then, any money left over can go towards your savings goals and everyday spending,” he says. “The guilt-free spending category allows you to buy what you want while knowing that your most important expenses are taken care of.”

Written by Kara Mason.
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