AP – Whether it’s a five per cent increase or a 20 per cent bump, a pay raise at work is an opportunity to take charge of your financial priorities.
A small raise might not seem like much when it’s broken down into a biweekly paycheck, but over time, that difference in income could provide a boost to your lifestyle or be put toward other financial goals.
Whether you decide to pay off debt, pad your safety net, invest, give back, improve your quality of life or treat yourself, a raise is a good time to think about the direction of your financial life.
KEEP AN EYE ON LIFESTYLE CREEP
Many personal finance experts warn against ‘lifestyle creep’, which is when you begin to spend more as you earn more. Lifestyle creep can take the form of buying more conveniences – like ordering food in more often – or buying more expensive or higher-quality items, like sturdier hiking boots or a better brand of skin care products.
“If you get a raise and use it to buy a new car or a new home or go out every weekend, your rate of spending might surpass your new income,” said founder of the investing education site Girls on the Money Mabel Nuñez.
Nuñez said that it’s good to reward yourself, but she advises clients to avoid buying more expensive things.
“Think about an expense that’s going to be a one-time purchase or something that’s going to make you better, like travelling somewhere new or taking a cooking class,” Nuñez said.
“Don’t spend just for the sake of spending.”
Once you’ve looked at your financial situation, you might find that it’s not in your best interest to increase your spending on non-essentials. But if you’re feeling good about the status of your debt and savings, then you might choose to spend more money on things that will make life more enjoyable.
For example, maybe you’ve been washing dishes by hand because you don’t have a dishwasher. You could put part of your raise toward a new appliance that’s going to save you a lot of time and energy. Or maybe you’ve been driving the same car for the past 20 years or living in a too-small house with your growing family. If you’ve planned for the increased costs, an upgrade that brings you increased functionality and comfort is a raise well-spent.
FOCUS ON HIGH-PRIORITY FINANCIAL GOALS
Financial life and wellness coach at Mindful Money Coaches Liz Carroll said that paying off debt should be a top priority, especially if you have more income that you can put toward it.
Beyond debt payoff, Carroll suggests people have a financial safety net of at least a month’s worth of expenses, with the goal of working toward three to six months’ worth. This could be done through regular recurring transfers from your paycheck to your savings account.
“Give your future self a share,” Carroll said. “I tell my clients to be mindful and pause before the quick reaction of, ‘I got a raise, now I can spend money’.
Instead, you should think, ‘What’s in alignment with my values?’”
Investing for retirement is another priority to consider.
“You want money in savings for an emergency, but anything above that that you don’t need in the next few years could be invested in a conservative way,” Nuñez said.
“Learn how to invest it in a smart way, and it’ll get you to the next level of financial life.”
TREAT YOURSELF AND GIVE BACK
Beyond debt, savings and other future financial planning, Carroll said you should feel comfortable celebrating your accomplishments.
Just keep in mind that you may want to put up some guardrails around the way you reward yourself so that you can maximise the financial benefits of a raise.
Carroll said something that equals five per cent of the total raise is a good amount to aim for if you want to treat yourself but are also paying off debt.
If you don’t have debt, she said, 10 per cent of the total raise is a good benchmark.
Another thing you may choose to do with your raise is to give back to your community.
Whether you donate money to your favourite charity or surprise a loved one with a random act of kindness, it can make you feel good to share your good fortune.
More income means having more resources to achieve your goals. By creating a plan for important financial milestones – as well as for fun splurges – you’ll get the most out of your money. – Chanelle Bessette
