What you should do after you get a raise
At one point or another, we’ve all overdone it a bit.
Whether it’s going a little too crazy on Friday night after the first taste of freedom or ordering way too much food at that first wave of hunger, it’s human nature to go overboard every now and then. The same thing can happen to your finances … especially when you get a raise.
There’s actually a phrase for overdoing it, post-raise — “lifestyle creep.”
Lifestyle creep, or lifestyle inflation, occurs when your standard of living goes up when your income increases.
Living beyond your means, though, can be detrimental to your financial situation.
Let’s say you (finally) get that raise you’ve been (so) deserving of. What do you do with it? Upgrade to a nicer apartment? Splurge on a new wardrobe? If you’re savvy with your money, the answer is quite simple.
While I definitely think you should #treatyoself on occasion, dramatically increasing your lifestyle with a pay increase is a dangerous game.
Avoid lifestyle creep, and instead make strides toward securing a financially secure future while still having fun with the extra cash.
Avoid the temptation of frivolously spending
Immediately following your pay raise, you’ll likely be tempted to make it rain at the shopping mall, on a new shiny car or a nicer apartment. But pump the brakes.
You might have dollar signs in your eyes now, but that smile will quickly turn into a frown if you recklessly spend cash on frivolous purchases. You’ll be stuck pinching pennies like you were pre-raise.
Treat yourself to a nice dinner, but then don’t make any big purchases or change your lifestyle.
Stick to your same budget for awhile until you can really re-evaluate your financial goals.
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Increase your retirement contributions
The best use of your new, fat salary? Increasing your retirement contribution.
You’re already used to living on a smaller salary, so it won’t hurt as much to take some of that cash and put it toward your future self. You won’t miss it if you never saw it in the first place anyways!
“If you got a raise, congratulations! Now increase your retirement contribution by at least 1 percent, which you’re unlikely to feel. Otherwise, that money can burn a hole in your pocket. If you’re really serious about saving for retirement, though, you’ll put most — if not all — into retirement savings,” Jill Cornfield, Bankrate’s retirement analyst, advises.
Revisit your budget
After you increase your retirement contribution, you’ll get a sense of how much your new take-home pay is after your raise.
If you’ve got a budget carved out (spoiler alert: you should), now is the time to re-visit it.
Personally, I like budgets that take a more simplistic approach, and abide by the 50/30/20 rule — spending 50 percent of your take-home pay on fixed expenses (like rent and utilities), 30 percent on “fun” expenses (like shopping and entertainment) and 20 percent on saving or other financial obligations.
Follow that same rule with your new salary.
The dollar amount you dedicate to your fixed expenses, fun expenses and savings will change with your new salary, but if you follow the same percentage guideline, you won’t be living outside your means.
You’ll be socking away even more money for savings, while still enjoying the perks that come with a bigger paycheck.
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