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.