We often spend a fair amount of time planning for bad things that’ll happen; i.e. the reason why we setup an emergency fund, have insurance, and build up a nest egg. On the flip side, I don’t think we spent enough time planning for the good financial things that’ll happen to us – raises and bonuses. I’ve done an article on how to spend a bonus but realized I haven’t done one on a raise. This idea came to me when a few weeks ago when I got a raise at work (along with a promotion). I’m so thankful to have gotten a raise, especially in this semi-recessionary economic climate, much less thankful to still have a good paying job! The question now becomes; now that I have a raise, how should I budget it?

Why it’s important to budget

Money has a funny way of finding a way to get to work if you don’t put it to work. This is also known as lifestyle inflation, or the tendency for us to slowly spend more and more money over time as our income grows (or doesn’t). If you don’t tell your money what to do, it’ll find a way to be spent! Another meal out, another vacation, another new purchase; money is sneaky!

So, just like you hopefully budget today, it’s important to budget when your income increases. It might take a paycheck or two for the full raise to go into effect (pay periods are often a week or two behind) and you’ll want to have a good picture of what your new take home pay is. Once you know that, take some time to give a name to those dollars – i.e. budget it. The good news is that you don’t have to save it all or invest it all; your new raise is also meant to be enjoyed!

Check the checklist

Ok, first thing to do once you’ve gotten a good understanding of how much extra take home pay you have available is to first take stock of your finances. With more money to figure out what to do with it, I’d recommend first understanding where things stand today. How is your debt load looking? I.e. credit card, student loans, car, personal loans etc. How much are you saving for retirement today? Do you have an emergency fund of 3-6 months worth of expenses set aside?

Hint; the answer to your debt load should be that it’s under control or you’re trying to be more aggressive towards you debt with higher interest level rates. It’s a good rule of thumb to save 15% to retirement but more wouldn’t hurt! An emergency fund of 3-6 months is a MUST – if the past 3 years has taught us anything it’s to better be prepared for the unexpected.

If you’re not where you should be with any of those, I’d recommend devoting a larger portion of your raise towards checking more of those items off the checklist. It’s important to control debt (especially the higher interest loans) because debt like that can not only slow your financial growth down, but also cause you to take a few steps back in your overall financial standing. Having a good safety net like an emergency fund will ensure you’re set up for success when a setback inevitably happens. A solid contribution plan towards retirement will mean you’re able to maximize the time value of money and dollar cost averaging and that will increase the likelihood of you being able to retire one day!

Have fun – now and later

Once you’ve thought through the important things to direct your raise towards (i.e. the checklist), you can now figure out where to put your newfound money. For me in this raise that I’ve just gotten, I’ve double checked and I’m all set on the checklist items. Our emergency fund is well stocked, I’m doing 15% to retirement and the only debt we have is our mortgage (which we locked in at a super low interest rate!).

I’m now thinking about the important of enjoying my money now, and enjoying my money later. So that means that with this raise I will think about maybe putting 50% of it to saving/investing areas and the other 50% to fun. Unfortunately in reality with how bad inflation is I think the ‘fun’ will more be like general living like groceries and gas! I’ve mentioned here and there but it feels like our budget right now is in a bad cycle of failing to help me meet my saving/investing goals each month. In my budget I have plans/goals for both saving and stock market (index funds!) contributions but they are a bit too aggressive and we always end up overspending in our general living/fun/gas categories. Groceries are not cheap! So I think in reality this raise will be more of a level set for our budget and I’ll use the bulk of it to increase our general living/gas/fun categories, with the hope of being more realistic in what we spend in those categories, which will in turn hopefully allow us to stop dipping into saving/investing buckets!

Maybe your situation with a raise might be different! Perhaps you’ve more accurately budgeting your money and can actually increase both your fun and your saving/investing buckets. Perhaps you’ll be able to get more aggressive with paying down debt or finally be able to save closer to 15% for your retirement! Be smart and remember that saving your money today isn’t lowering your level of fun, it’s just delaying it; allowing you to have fun today and later on!

Summary

Raises are amazing, they’re a reflection of the hard work you put into your job. Take advantage of a raise and be sure you’re being thoughtful in putting it hard to work for you!