In these difficult economic times, raises are few and far between, but if you are among the fortunate few who get one, it is important to consider how to wisely spend that extra money.
What many people do after a raise is adjust their spending upward so that the extra income is absorbed into what has been referred to by such respected journals as Forbes and the Economic Times as “lifestyle inflation.” When this happens it seems as if the raise never happened and we wonder why we feel the same financial pressures as before the increase.
Below is a list of 6 strategies that will help you to make positive lifestyle changes as a result of the additional income.
Strategy 1: Put the money in the bank.
One of the most effective methods to take full advantage of your raise, and the one most often cited by financial advisors, is to deposit the difference between your prior and new income. You could do this via direct deposit by withdrawing the same amount as when earning the lower salary. If you think you may have the urge to cheat, you can also deposit the extra money in a CD account (known as Fixed Deposit in Malaysia) which typically charges a penalty for early withdrawal.
Strategy 2: Invest in your career
This can be thought of as a rollover investment since you are putting money back into the very reason you obtained a raise in the first place: enhancing your knowledge, skills and abilities. (KSAs). Such an investment could include pursing a college/advanced degree, enrolling in a certificate program or continuing education courses, joining professional associations, or adding some polish to your personal brand by purchasing new outfits.
Strategy 3: Adjust your budget
In light of the extra income, create a revised budget for how to allocate the extra money. Perhaps your budget is squeezed to the max in some areas. A raise permits you the opportunity to devote more funds to certain categories of expenditures that you have had to cut-back on. The extra money also allows you to put some savings toward emergency expenses. Just be careful not to create a need where none existed before as this will lead to lifestyle inflation.
Strategy 4. Pay off some debt
A significant part of America’s financial woes arise from the large amount of outstanding consumer debt. While credit card use is important in building and maintaining a strong credit history, the cards are best used with caution and planning. A raise provides an additional cushion between income and expenses so why not use part of the extra money to make larger payments on your credit card balance? This not only lowers your debt obligation, but also improves your credit score.
Strategy 5: Balance your spending pattern
Balancing personal finances is important in ensuring a steady cash flow. Balance means that you portion your income between savings, necessary expenses (rent or mortgage/food, commuting costs and other essential items, and miscellaneous expenditures (e.g. entertainment and travel). For example, 50 percent of net income might go toward rent/mortgage and other essential costs; 20 percent to career advancement activities, 20 percent toward savings and the final 10 percent toward miscellaneous costs.
Strategy 6: Go ahead and have some fun!
You earned your raise so it is only natural to want to celebrate. Nothing wrong with that as long as you are responsible and remain budget conscious. You can employ a systematic approach for spending the extra income. With your first paycheck you spend 100 percent of the extra money on treating yourself to a special gift. Thereafter, you systematically decrease this extra spending by a certain percentage each week (80 percent; 60 percent 40 percent) until you are aligned with the revised budget you created.
This is a guest post by Daniela Baker, a personal finance blogger with CreditDonkey, a credit card comparison site.