You worked hard to be a good employee.

Maybe you even stayed late sometimes or covered for other employees who left.

You finally worked up the guts to ask for an increase in compensation or had your scheduled review with your boss.

You got a raise.

It feels incredible, and you know you deserve it after everything you’ve done for the company.

However, along with this feeling of accomplishment comes an opportunity: an opportunity to make a better present or a better future.

Where Most People Fail

Most people see this increase in pay as a bonus; something to boost their present lifestyle.

Though this is technically true, it ignores two things:

1. The power of increasing your savings over time. Due to compound interest, increasing how much you save year over year makes a tremendous difference in how quickly you build wealth. Don’t believe me? Mess with this retirement calculator and try slowly increasing monthly contributions.

2. Inflation. Sure, your income may have gotten you by just fine before. But a year or two down the road, your cash won’t go as far as it used to as the cost of food, rent, and everything else increases.

To truly take advantage of that raise and work toward building the kind of life you want, that raise needs to be seen as an opportunity to better your future lifestyle.

But I Deserve to Enjoy My Raise

The word “deserve” gets people in trouble when discussing spending money.

You may deserve your raise based on how helpful you have been to your employer.

You absolutely deserve to have a better life because of it.

But you don’t deserve to go out and blow the money you worked so hard for right away, leaving your future self stuck in the same place you started.

Avoid Increasing Recurring Expenses

Common things people “deserve” when they get a raise are a nicer place to live or a nicer car.

Maybe the car payments are covered by their raise, so they feel like the car is essentially free.

These are known as recurring payments because you have to pay them every month.

Instead, celebrate your raise through a one-time purchase, such as a dinner with friends or an item you’ve wanted for a while.

Enjoying your raise in one way or another is important to motivate yourself to get another raise and reward yourself for your hard work.

To avoid overspending, a good rule of thumb is to limit this one-time spending to as much as one month’s worth of your raise.

For example, if your raise nets you $100 extra monthly, limit your one-time spending to $100.

This ensures you don’t set yourself back too far for the sake of celebrating.

What Do I Do With the Raise?

After all of this what not to do, let’s cover what you should do.

I like to follow the general rule of adding at least 50% of my raise to my savings rate.

“Savings” can mean putting it in a high-yield, investment, retirement, or long-term savings account.

For example, if I make $100/month extra, I want to save/invest at least $50/month extra.

This gives me some breathing room to improve my life while significantly increasing my savings.

The more, the better.

The last key is to automate these new savings immediately.

Automate your additional investing/savings into the appropriate accounts when the raise goes through.

Otherwise, you could push it off or forget to increase it.

Through it all, enjoy your raise and be proud of yourself.

All the money in the world isn’t worth it if you don’t enjoy life.

Until next week.

Best,

Evan

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Before You Go

Maybe instead of a raise you got a bonus, and you’re not sure what to do with it.

The worst thing you can do is let it sit in cash, but what’s the best way to grow it based on your personal situation?

This tool, the Lump Sum Calculator, from Financial Birds & Bees is designed to help you figure out the best way to grow that money based on your unique circumstances and preferences.

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