6 Strategies to Stop Wasting Your Raises

Many, many companies are still struggling to recover from the recent recession, and that means raises are hard to come by these days. But if you’re lucky enough to get one, or expect one soon, you’ll have some decision-making to do on how to handle it.

The worst thing, arguably, is to ignore the raise completely and let your subconscious dictate how you handle the money. The typical result is lifestyle inflation, which means your spending adjusts to your new income as if the raise never happened. Bad idea!

I propose six strategies—six distinct psychological approaches to handling a raise that I have used, at one time or another, to make a meaningful change to my life as a result of the newfound income. The six are:

Strategy 1: Bank it

One of the “purest” methods of taking advantage of a raise, and the one most often cited by personal finance gurus, is banking the difference between your new and old paycheck. That might mean an automatic transfer into a savings account, or other means of putting the money away.

Ignoring the fact that you just got a raise can go a long way to curbing any effects of lifestyle inflation, since you’re still having to make do on your old salary.

Strategy 2: Invest in your job

Putting money back into the very reason you have the raise in the first place seems like a good idea. In fact, it probably gives you a much better chance to get future raises.

What could this consist of? I can think of: continuing education/schooling, wardrobe enhancements, new certifications, books or tools to help you work, and joining networking or professional groups/associations.

Strategy 3: Relieve your budget

It’s possible that a raise is just what you desperately needed to stay afloat. Some of your budget categories might be squeezed so tight that any irregularities would make them burst.

You could use your raise to make those areas of your budget breathe a little easier, or even save ahead for irregular expenses and contingencies.

Strategy 4: Set up a diminishing treat fund

Let’s face it—you probably feel like you “deserve” to spend the extra money “because you’ve earned it.” In a sense, that’s absolutely right—your hard work did pay off with the raise, but let’s be responsible.

How about setting up a systematic way of controlling the extra splurges? Spend 100% of the extra money on your first paycheck on whatever you want, then diminish it over the next several paychecks, spending 80%, 60%, 40%, and so on…until you’re saving most of it away.

Strategy 5: Attack your debt

I would argue that America’s #1 financial problem is the large amount of outstanding consumer debt. Why not use some of that extra income to make a permanent dent in your family’s obligations?

Attacking debt with any kind of effectiveness requires good cash flow—space between income and expenses. While expenses can only be cut so far, income is limitless, and a raise can create this much-needed space and provide an opportunity to get out of the debt cycle.

Strategy 6: Take a balanced approach

Balance in personal finance is critical to how I handle my money—in fact, I view it as one of my three basic rules of personal finance. As a result, the most realistic approach for me, and the one I have taken most often, is a combination of the first 5 strategies I outlined.

That might mean only 50% of my income is saved, 30% goes to career development, and so on…with each area weighed based on its importance.

Readers—What are your plans for a raise?

Let’s put ideas into practice—how did you spend your last raise? Be specific. If you could do it again, what would you change? If you got a 10% raise tomorrow, would you utilize one of these strategies or do something else entirely with it? Head down to the comments and share your thoughts.

14 thoughts on “6 Strategies to Stop Wasting Your Raises

  1. You need to put any raise aside, who knows what the future holds, we’re not on the road to recovery just yet.

    1. I think it’s coming–seriously. I’m completely with you though, because I’m afraid of what people will start doing once they see some extra money again.

  2. When I get a raise, I try my hardest to not let my “living expenses” creep up so that I can sock that extra money away into savings. Now, after some big life changes lately (marriage and now, joint finances) I am realizing it’s more important than ever to get disciplined about money and to pare down the day-to-day expenses.

    Great post and nice food for thought.

    1. Congratulations! (Those days are not far behind for me…). The little day-to-day things always seem to “get us.”

  3. I recently got a raise with a career change. It’s finally letting me pay down debt that I’ve been carrying since college! But I haven’t gone crazy with it. One third goes to debt and the other 2 thirds goes to emergency funds.

    1. Sounds like a good balance, Brad. I know more than a few of us who have switched careers recently. 🙂

  4. When I received my last raise, I was just months into being consumer debt free. I purchased a dining table & lighting system for my house as gift to myself, LOL!

    Since then I have banked the increase monthly at ING and watch it grow in my car fund account.

  5. My raise kicked in on Monday. I treated myself to a latte and am saving the rest. I have been toying more and more seriously with going back to school in the next few years and want to do it debt free.

      1. Lol if I was to get a raise, a latte would probably take it all (if I did get a raise, it would be COL only, we can’t get performance based raises).

  6. Pingback: Wasting Your Raises and How Much Should I Save Per Year?

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