Three Things to Do With Your Next Pay Raise

Many employees see a pay raise as an excuse to immediately upgrade their lifestyle. The extra money soon disappears, because for many of us when we have more, we spend more. The raise goes on everyday spending, or perhaps a big upgrade like a new car (along with a new, bigger-than-ever monthly car payment).

What this means is that more money simply becomes more stuff, rather than more financial stability and security. The raise gets absorbed by lifestyle inflation, rather than actually improving your finances.

If your aim is financial security and wealth building, you need to treat raises a little differently. Here are three strategies to consider.

Invest

The best thing to do with a raise is pretend you didn’t get it. Don’t spend it. Don’t plan to spend it. Don’t even save it (at least not in to a traditional savings account). Invest it.

For many this is hard to do. You want to reward yourself for that raise with something tangible. But if you can tweak your mindset and learn to see a growing investment account as something tangible, future you will thank you. Take the raise, invest it, and allow your spending to stay exactly the same.

There are exceptions of course. If you have high interest debt or no emergency fund whatsoever, then the extra money should go to this first, but the principle remains the same. You’re still not using the raise on stuff. You’re using it to buy more financial security.

Splurge, but with a Delay

Some people choose to enjoy their new income increase, but with a delay. This is the concept of living ‘one raise behind’. At the beginning of your career, you invest your first big raise, and with the next one you upgrade to the lifestyle someone on your previous salary might have.

There are no hard and fast rules for how to do this. We all need some flexibility with our finances, but embracing the general concept means you are always living within your means, rather than living at the edge of comfort, waiting for the next raise.

Whereas those who invest every raise will continue to live a simple lifestyle long-term, those living one raise behind will allow for lifestyle inflation, just at a slower rate, delaying gratification and building wealth slowly.

If you can let four or five raises go entirely into building wealth, you’ll see big growth and eventually financial freedom. If you live one raise behind, you buy yourself a financial cushion and less day-to-day stress.

Sometimes, of course, the choice isn’t yours. Changes in lifestyle mean changes in expenses that can eat up new raises whether you like it or not. Some people manage to invest every raise easily until they have children for example. Then things get expensive. So if you’re currently childfree but planning to have a family in the future, all the more reason to invest those raises now.

Upgrade, but Strategically

You can really tell when some people get a raise. New car. New phone. New designer handbag. Luxury vacation pics on Instagram. But did they really need (or even want) all those upgrades, all at once?

If you really feel the need to, you can of course spend at least part of your raise on life upgrades, but why not do it strategically? Your best strategy is probably to upgrade just one or two areas that will make a huge difference to your life, regardless of whether they’re the areas other people would upgrade. And — this one is important — even if nobody else will know what you upgraded.

I’m talking things like a new gym membership, a regular housekeeper, a better health insurance policy, or maybe even a weekly massage. Something that will have a big impact on your health, wellbeing, or time use in a way that matters to you, even if you can’t flaunt it in front of the neighbours or post it online.

The strategic upgrade is basically something that significantly improves your life, but doesn’t necessarily impress anyone else.

However you use your next raise, give it the thought and planning that future you deserves. Resist the reflex to immediately turn it into stuff. Let the gap between your income and your lifestyle grow bigger, while your investments and financial freedom do too. Try and avoid the all too common trap of being financially constrained even on a high income, constantly one raise away from truly feeling secure.

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