You just got a well-deserved raise, and now you’re thinking of all the things you can do with your newly acquired wealth, like finally being able to afford that new car, a new apartment or going for a shopping spree to celebrate.
Rather than engaging in any impulsive spending, entrepreneur Kevin Daum explains that you should keep your financial goals in mind first. Being tempted to immediately spend the extra money is a common pitfall, and while you’re allowed to reward yourself, make sure you’re making progress on more important goals. So, what should you prioritize?
You worked hard for your raise, and unlike the majority of Americans, you asked for one and got it. Business Insider explains that more than 70% of employees think they deserve a raise, yet, never ask for one.
But now, like most who receive a bonus or a raise, you might be tempted to succumb to lifestyle inflation. Marcus defines lifestyle inflation as the rise in spending that follows an increase in income, fueled by workplace expectations and the general desire for a nicer, fancier life. Many buy fancy new cars or other status symbols because now they can afford them. This is a common mistake and could very quickly get you into the same cycle of living paycheck-to-paycheck, just like you did when you were earning less.
Invest and save
Instead of falling into the trap of upgrading your lifestyle and spending more money, your first priority should be to save. If you haven’t started saving for retirement, then start now and put away your raise amount in a tax-sheltered 401(k) and IRAs. This way you won’t be tempted to adjust your lifestyle and you’ll be saving for your future while saving on taxes every year. The key is to live well within your means, and the earlier in life you start saving the better, as you will accumulate more money for your retirement. Here’s another way to look at it.
Let’s say that when you’re 25, instead of spending $800 on a pair of fancy shoes, you save that money in an investment that gives you a 5% interest rate return. Financial writer Jean Folger suggests that when you turn 65 and are ready to retire, even without any further contributions your initial $800 would be worth around $5,632. Although this amount does not take inflation into account in actuality it may be closer to half. Still not bad, right? Now imagine if you would have regularly contributed the portion of your pay raise for 40 years.
Ask for that raise
Now if you’re part of the 70% we mentioned who have not asked for a raise, how do you muster up the courage to do it? When negotiating a raise with your boss, and when it comes to your performance and achievements, CIO notes that you should provide quantifiable examples of your contributions to the company.
For example, how much money you’ve made the company or how much time you’ve saved them.
So, if you’re a star and your accomplishments and performance have been above average, your boss might be more amenable to giving you a raise than you might think. Organizations know that unhappy employees are disengaged and dissatisfied employees who might be inclined to leave, costing employers more money in the long run.