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What To Do With My Raise?

I found out last week that I will be getting a slight pay increase. Of course, since I work in the non-profit sector, this isn’t a staggering amount of money. However, applying a heightened level of discipline to handling future paychecks pays off in the long run. As a general rule, I have a three-pronged approach to handling a raise without squandering it on an unnecessary purchase.

Step One: Go Ahead, Celebrate (a little)

Sometimes I spend too much time and energy worrying about money. When extra money does enter my life in the form of a raise, I like to use that first paycheck and take 50% of the pay increase and spend it on something celebratory. Life can be stressful, at times. I intend to take a portion of my increase–in cash–and splurge. Just a tiny bit, though.

Step Two: Pay It Down

Pay It Off. In my opinion, money from a raise should then be applied to paying down your debt until you have paid it off entirely. You shouldn’t use this pay increase as a green light to increase your standard of living. In fact, you should maintain your current standard of living. Do not use it to run up debt. As a side note, too many people set their lifestyles to their annual gross, instead of their annual net income. In the end, this only reinforces the endless cycle of overextending yourself financially. Live to your net income.

Step Three: Save it. Save it. Save it.

Once the debts are paid off, the money should then be applied to filling your three-to-six month emergency fund. Once you have six months of living expenses in a savings account, then you should take that money and aim to fully fund your IRA this year. You should look into mutual funds and other investments that fit your lifestyle. (There are a million sites out there with more helpful investing information than I will ever post in this blog.)

It does take a focused and intentional approach to your financial life to be able to have the discipline to treat your pay increase as such. In the long run–the very long run–you will be happy that you did. Pay off your credit card debts and filling that emergency fund adds such a wonderful sense of freedom to your daily life.