I love this question. I love thinking about what to do with the “extra” money when you get a raise. It can be tempting to start increasing your budget categories right away. Maybe you feel like you’ve been cutting it close every month on your shopping budget. If you’re like me, it’s most likely your eating out budget…I love my Chipotle!
However, I don’t recommend increasing any categories yet unless you’re paying off debt. If you’re paying off debt and you want to put all the extra money from your raise to paying that off, please do. If you’re not going to do that, here’s what you do.
Don’t Change Your Budget Right Away
Let’s say you get a raise in May. Don’t adjust your budget categories until the end of the year. When you went into the year, you set your budget for a reason. You wanted to stick to the plan, save what you wanted to save and spend what you wanted to spend. Don’t change that.
This means that all your extra “raise money” will go into savings for the year. Imagine how awesome that will be at the end of the year when you’ve saved significantly more than you budgeted for. Then, going into the following year, you can make some adjustments to your budget. Just make sure that you always increase the amount you’re saving FIRST, and then increase some other expense categories.
If possible, try to take half the amount of your raise and put that to savings or investments. Let’s say you got a $3,000 raise. Take $1,500 and put it towards some sort of savings category or investment category. Then, take the rest and increase some of your monthly categories. Don’t feel pressure to increase your monthly categories if you feel like you have enough each month for the lifestyle that you want and can sustain. This advice applies if you feel like you need to increase your monthly categories. Ideally, you put all your raise money into savings or investments.
If you continue to do this throughout your lifetime when you get raises, you’ll end up saving a TON more than you would if you put your raise into your budget right away. In addition, this ensures you don’t increase your lifestyle too much with each raise. It allows you spend more and “improve your quality of life”, but ensures you don’t get carried away.
Your future retired self will thank you for doing this.
Option 2: Absolute Necessity
If you absolutely must increase your standard of living right when you get a raise, still put half of your increased earnings towards savings or investment and use the other half to increase some of your monthly budget categories. I understand that you may really need the money for something, but it’s critical that you develop the habit of putting a good chunk of your raises away. This ensures a healthy scaling of your lifestyle without overspending. Think about it this way: you have been living without that money for X number of months or years. Don’t let the raise trick you into thinking you “need” to spend that money.
And yes, it’s okay to go celebrate when you get a raise. Have a fun night out, but then get back to your routine. Don’t blow it all on a new car, or worse yet, spend more than your raise.
I’d love to hear from you. How do you make adjustments currently when you get a raise?