THE SMART WAY TO HANDLE A PAY INCREASE
What is the smart way to handle a pay increase? Do you have a pay increase coming soon? Are you getting ready to take a new position with a pay increase? If either of these applies to you then you are probably getting excited about the extra money on your paychecks. Before you start increasing your spending let me give you some suggestions on what I believe is the best way to handle a pay increase.
What is the smart way to handle a pay increase?
The smart way to handle a pay increase is to honestly to act like it never happened. You might think this sounds crazy but let me explain myself. It is absolutely awesome that you have moved forward in your career and have received an increased salary but more people choose to increase their spending with the increase in pay, therefore, they never really reap the benefits of that pay increase. This is often referred to as "Lifestyle Inflation" and is often the reason that with each pay raise you receive you do not seem to get ahead financially. So how can you prevent this from occurring in your own life?
Step back and consider your financial situation
Why not evaluate your situation further and consider the best ways to utilize the new funds. Do you have debt that you are working to pay off? Do you have an emergency fund? These are the first things that I can honestly say I would begin to put this new increase towards. Do you have a 401k set up with your current job or have you ever started one? I waited far too long to begin saving for retirement so this is one thing I will frequently try to remind people of because it is important.
Retirement age is closer than you think
Retirement may sound far away at whatever age you are at but the amount you put aside today can really help you to reach retirement sooner and be in a far better place to retire. Don’t be like me, start saving today. You can increase what you are putting away in your current 401k or even start an IRA in addition to your 401k plan. I am not a financial advisor so I cannot legally advise you of anything related to this but I can say it would be a great time to sit down with a financial advisor and get some advice. Some companies actually offer a one on one with a financial advisor as a service to their employees, if your company does this may benefit you to take the time to meet with them.
The choice you make and the effect on your future finances
Whether you start putting more into retirement, saving towards your emergency fund or paying down debt faster. The way you choose to spend your pay increase is completely up to you. I personally prefer to build up my emergency fund prior to increasing my debt payoff. In my own life, I have found that this has really helped me to not fall further into the credit trap. Having an emergency fund is so important when an emergency arises because this will no longer mean going further into debt.
My final thoughts
Whatever you choose to do with your new income increase is a very personal choice. I hope that this has been a helpful reminder to consider the many opportunities that this new increase has given you. When you choose to not increase what you are spending and continuing to live on the same income you were accustomed, to you are making a wise decision for your financial future.
