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Make the most of your Pay Raise with Smart Spending

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If you’ve earned a sizable raise or landed a new job with a big bump in salary, it’s cause for celebration. To make the most of your new earning power, though, be careful not to let that fancy bottle of wine or expensive dinner turn into a weekly routine.

This is what financial planner Brian Frederick, J.D., CFP, calls “lifestyle creep.” “Lifestyle creep is when luxuries become necessities or when wants become needs,” explains Frederick, principal of Stillwater Financial Partners in Scottsdale, Ariz. “When you make more money, you spend more money.”

Still, saving is easier said than done, which is why it’s important to not only celebrate your salary increase, but also strategize around it. The following tips can help:

Set goals

Denise Winston, the Bakersfield, Calif., author of Money Starts Here! Your Practical Guide to Survive and Thrive in Any Economy, recommends setting a goal and earmarking extra salary for big-picture objectives—for instance, retiring early, buying a home or starting a business—to avoid spending it. “I equate it to GPS. Some people get in their car and drive around, just cruising … but if you plug a destination into your GPS, it’s going to tell exactly how to get there. Getting a raise is a chance to pull over and recalculate so you can get to your financial destination sooner.”

Divert the extra dollars to savings

Even if you commit to a specific goal, you might be tempted to spend your raise. Reducing the accessibility of this extra cash can help. According to Peter Murray, co-founder of Seattle-based LifeCounts, an online financial-management platform, you can “hide” your extra funds by setting up direct deposit in the amount of your raise. For instance, if you get an extra $100 a month, you can arrange to have your bank automatically move $100 from your checking account to your savings account on the last day of every month. Winston recommends going a step further by making your savings account difficult to access—for example, by not linking it to your checking account and ATM card.

Grow your pay raise

The first thing you should consider upon getting a raise is increasing your 401(k) plan contributions, Frederick says. “Your first priority is making sure you get as many matching funds as your employer allows,” he says, stressing the net effect of a bigger employer match: even more money on top of the raise you just received. Likewise, Murray adds, you can use your raise to first pay off any credit card debt you may have, the interest on which could end up cannibalizing your extra income in the long run.

Invest in your future

Another way to make your raise bigger, Frederick says, is to invest it in education—an advanced degree or a professional certification—which could increase your long-term earning potential, turning one raise into a series of raises as you continue down your career path.

Although saving is wiser than splurging, it’s important not to completely deny yourself. “For any financial plan to succeed, it must be balanced,” Murray concludes. “You worked hard for your raise. Enjoying a small part of it is an important part of experiencing the reward.”  

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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