How should I best spend my pay raise?

Most companies have some kind of annual merit raise process or a contractual environment where every so often you get a bump in your pay. The question is, what do you do with this new-found money?

The company that I work for has an annual merit raise process and I was fortunate to receive a modest pay increase this past week. It got me to thinking about how I used to view money as opposed to how I look at things today.

What I used to dopay raise

I remember when I was younger and I received a raise, the first thing I’d do would be to get out my calculator and try to figure out about how much more my pay check was going to be after taxes and the like were taken out. (Actually, I still do that.) My next thought though was how can I spend this extra money that I now have coming in.

I remember one particular year. I had received news of my raise. At the time I was driving a car that was more than sufficient for my needs, but it wasn’t the greatest in the snow. I don’t remember the exact numbers but for the sake of the story we’ll say the raise gave me an extra $100 a month. My car payment then was about $250 or so, and car fever set in big time. Figured with my raise I could go buy a nice SUV with 4 wheel drive and I could “afford” a $350 payment. Never mind that I had credit card debt and other debt. I “needed” that SUV because it was a safety issue in the winter! So I headed off to the dealer and traded in a car (that I actually really liked) for a new SUV because with I figured I could afford it.

That’s why most people feel broke

Unfortunately, in those days I think my response was pretty typical of the way most people handle their money.

At the same time I was buying that new car, I was also frustrated that I could never seem to get ahead. No matter how hard I tried something always came up and once again I was feeling that there was too much month left at the end of my money. I had no margin, because when I got things like pay increases, I simply found new ways to spend it.

A better alternative for your pay raise

So what should I have done? There are several things you should consider when you are fortunate enough to get a pay raise.

Celebrate

It might surprise you that I list this first, but there is nothing wrong with taking a reasonable amount of that money to celebrate. Have a nice evening with your spouse. Maybe buy an item you’ve had your eye on for a while. The key word in what I just said is reasonable. Taking on a $350 car payment when I had debt was not in the reasonable category. But there is nothing wrong with celebrating a little.

Add to your debt snowball

If you are still working on your debt maintain your existing lifestyle and take that extra money each pay and through it at your smallest debt. A pay raise is a great way to get that debt snowball turning even faster.

Save it for a special goal

If you don’t have an emergency fund, use this extra money to get started. Or if you have your debts paid off, use this extra to save toward a special goal. Start saving up a down payment on a house if you are renting. Start a car fund so that when you next need to buy a vehicle you can pay cash and leave car payments behind forever. Save for a special vacation, then you can pay cash and your trip won’t follow you home.

Bump up your retirement savings

Take the opportunity to add a percentage or two to your retirement savings. If you are contributing to a workplace retirement account, you can up this percentage and you won’t ever miss it since the money is taken out of your pay before you see it.

Start a college fund

Do you have kids? College costs continue to sky-rocket and student loan debt leaves many young people in bondage for years. Start a college fund so that you can help your kids get their education without having mountains of debt.

Pre-pay the mortgage

If you have a mortgage use that extra money to make extra payments on your loan. Particularly early in your mortgage when your payments are mostly interest, making extra principal only payments can shave years off your loan and save thousands of dollars in interest.

Revisit your budget

Are there categories that always seem to be a struggle? Consider bumping those up a little.  If you are in otherwise good shape financially there is nothing wrong with raising your lifestyle a little. Just be intentional about it.

Increase your giving

Last but certainly not least, increase your giving. If you regularly tithe, then of course that 10% will go up accordingly with your new salary. But what if you were to start giving 11% instead of 10%? Or perhaps there is another charity that is very dear to you. Take this opportunity to give back in an area where you feel there is a great need. You can never go wrong by being more generous. In fact, I believe that when God sees one of his children holding their blessings loosely and being willing to give, he sees a child he can trust with even more blessings.

 Make your pay raise count

If you are like I used to be and when you get a raise within a couple of months you wonder where it all went, decide this time to make it different. Be intentional. Use that extra money to do something that truly changes your life and the lives of those around you for the better.

How do you plan to spend your next pay raise?

 Photo credit: Unhindered by talent (creative commons)

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