What Should I Do With My Raise? How to use a cost of living adjustment

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It’s easy to let small amounts of money go in (and out) of our lives unnoticed. In the past I’ve written posts on what to do with a lump sum of money, like a bonus or a tax refund, and this post is a subtle play on that theme. Many of us received a raise this past year. With the economy still recovering it might not have been a large increase. Perhaps a cost of living adjustment of 2.5%.

Therefore, this small percentage could simply slip through the cracks. It is our human tendency to spend what we make unless we have a plan to save. We see the money in our checking account and we increase our lifestyle accordingly without giving it much thought. Here are several guidelines to help you effectively save your raise.

Fund an Emergency Account

Put a little money aside each month for this purpose. Let’s say your take home pay is $50,000 and you just received a 2.5% raise. That is approximately $100 per month or $1,200 that you will have in an emergency savings account in a years time. Set up automatic saving transfers, timed with each paycheck.

Increase Retirement Savings

Not long ago I wrote a post titled, Playing Catch Up On Retirement Savings. In that post I emphasized the importance of increasing retirement savings contributions as you receive a raise or cost of living increase. “If you increase your 401(k) contribution each year a few percentage points at a time that money will be more likely to accumulate to a meaningful amount. Small contribution increases, that correspond with cost of living can make a difference over time.”

Increase Amounts Toward Short Term Goals

Short term goals will start to accumulate faster with additional increases. Perhaps you have an automatic savings plan in place for expenses such as a car or family vacation. Make this amount a little larger. Not only will you accomplish your goal sooner but the money will be spent on something of true value to you.

No Lifestyle Increases

Usually I don’t phrase things “to-do” in the negative. However, this is an important exception. If you want to think of it positively, “keep your lifestyle the same.” Its so easy to increase your lifestyle when you make more money. You know, you buy the more expensive towels. The concept here is to stay frugal in order  to leave room for savings.

Be sure to capitalize on a raise (even it its a small one) so that you can continue to SaveUp!

This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.

Photo credit: DigitalWiseGuy.com

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