What should you do with a pay raise? I have a feeling that many of you are spending it without a second thought.
The other half of you are probably wondering, “What pay raise?”. I can understand. Many people have been operating on the same salary for quite a while. But, many of us have gotten a little bump in pay over the years.
In 2016, CNN estimates that American workers will receive a 3% pay increase in their paychecks. President Obama said that the US military would see a 1.3% increase in their paychecks this January.
So, what do you do with that money? Far too many of us simply do nothing. We treat it like the pay raise didn’t even exist. Many of us find ourselves simply spending more without even realizing it – granted it’s often on $50 or so each month,
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A friend and I were talking after work one day, and she told me that she’s been living off the same paycheck figure that her employer paid her five years ago, despite having earned a promotion and a couple of pay raises since that time.
I’ve actually been doing the same thing. I simply pretended that my new promotion at work didn’t include a pay raise. Instead, I diverted that extra money each month into a separate savings account automatically. I’ve been fooling myself into living off my lower salary from a few years ago.
So, what should you do with your next pay raise? Here are a few tactics for you to make the most of your pay raise.
Pay Off High Interest Rate Debt
One great thing that you can do with a pay raise is to pay off high interest rate debt or any debt for that matter. You can like that the annual percentage rate (APR) that you would have paid on your debt as your rate of return.
Who would not kill for a rate of return on your investments to be 18% or more? You have to think of paying off your debt as earning a return on your investment.
You’ve gone into debt. There is nothing that you can do about the past. You have to look towards the future. Paying off your debt is the same as investing in your future. You can look at using the debt snowball plan to help you come up with your plan of attack.
Start Investing for Retirement
Another great use of for your pay raise is to start saving for your retirement. Or, if you’ve already begun saving, increase your retirement savings.
Any pay raise that you earn is “found money”. It’s money that wasn’t there before in your budget. It’s new money. If you allocate it to add to your retirement investments, you’ll never realize that the money is missing.
You’ll never miss that money. You didn’t even realize it was there. Increase your automatic allotments to your 401k retirement plan or Roth IRA by the same amount you receive in a pay raise. Live off of your last year’s salary. Pretend like you never even got that raise.
Build Up Your Emergency Fund
We all know that we should have three to six months of living expenses saved in a fully funded emergency fund. But, for many Americans, that’s a lot of money to set aside.
For example, if you earn $60,000 per year, you would need to have approximately $10,000 to $20,000 set aside just for living expenses. If you wanted to continue with your current standard of living, you’d need to increase your emergency fund to $15,000 to $30,000 to cover your entire take home pay amount.
I know that I have struggled in the past with building up that much of a stockpile of cash in an emergency fund. You can add your new pay raise each month to your emergency fund as another way to help you build up to that level.
The Danger of Lifestyle Creep
There is a danger of lifestyle creep when you receive a small pay raise. If you earn $5,000 per month before taxes and earn a 3% pay raise, you’ll only see an additional $75 in each two-week paycheck.
When you start talking about such small amounts, it is very easy to simply roll that money into your spending without realizing it. Your new pay raise could very easily equate into an additional night out on the town, a movie, eating out at a restaurant, and other fun activities.
Before you know it, you will simply just have absorbed that pay raise into your life. That’s lifestyle creep.
Is lifestyle creep necessarily a bad thing? Should we not enjoy a little bit of the fruits of our labor? Splurging every once in a while isn’t a bad thing. The danger comes from simply looking the other way and not deliberately and thoughtfully putting our pay raises to good use.
Are you receiving a pay raise this year? What do you plan to do with it?