What To Do With Your Raise

By Ryan J. Taylor

If you recently received a raise and dreaming about how much extra cash you will have to burn, stop dreaming. Raises have an odd way of not really changing people's financial situation at all. If you're a saver, you will save a little more than you used to with your raise. If you typically allow your income to determine your budget, you will probably continue to waste money without tracking where it really all goes. Your money management habits, or lack of, will generally stay the same regardless of income.

Let's look at a hypothetical situation. Steve is an employee that currently makes $50,000 and counts on his annual 5% raise. Rather than planning what to do with his raise, Steve spends his money until his check is gone. He doesn't really know where the money goes and doesn't feel like his pay increase helps him become wealthier.

If, however, Steve continued to live as if he were still making $50,000, things could be different. By planning to invest his entire 5% raise in a fund that returns 10%, here is what he could experience:

Year 1: $2,750
Year 2: $8,663
Year 3: $18,198
Year 4: $31,870
Year 5: $50,252

In just five years, Steve would actually able to accumulate $50,000. Note that this does not take taxes or fees into consideration. Those fees can be achieved if you deposit funds into a retirement account, such as a 401(k).

Don't let your hard-earned raise not really feel like a pay increase because of your poor money habits. Put the money towards some good use, such as an earlier retirement. For example:

• Treat yourself. You've earned it, so use some of the extra cash from the first pay period or two to reward yourself.
• Adjust your 401(k) to put that money in your retirement account. Its pre-tax dollars, you'll reduce your realized income for your taxes and you can take advantage of any company matching incentive.
• Use your raise to pay off mortgage faster, credit cards or other bad debt.
• Allocate a portion to deposit in your "fun budget", and invest the rest to ensure you have a healthy fun budget later in life.

If you could live comfortably off your income before your raise, most likely you can continue to live that way. Use this extra cash in a way that will help you increase your wealth and reach your financial goals more quickly. If your expenses already exceed your income, use your raise to get on your feet and take control of your personal finances. Whatever you do, don't disregard creating a plan for your money or you will end up spending it without even noticing where it goes.

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