How should you spend your next pay raise?
11 August 2006MP Dunleavey has written an article for MSN Money discussing this issue. It’s a shame, really, because most people use a raise as a chance to blow a golden opportunity to painlessly save some more money. You weren’t making that money before – so it doesn’t take any effort at all to live the same way you had been and sock that money away in your savings. But instead of doing that, the vast majority of people take the money and spend it on new stuff. The instant it comes in, it’s gone to “celebrate.” Dunleavey gives some good ideas on how to avoid this temptation – the one I like is:
Like Option 1, you simply take the entire raise and put it toward one of your financial goals, but when that one’s complete, you simply shift the money toward another goal.
This might work well for Lyndsey, who can now put an additional $130 a month after taxes toward debt, becoming debt-free in 19 months instead of two years.
Once she’s finished paying off her debt, Lyndsey could put the raise toward her retirement, to which she’s only contributing 1% of her income. In this case, she would be able to sock away the gross amount of her raise each month, about $180, because her contributions would be tax-deferred.
This option requires a pretty Zen mindset, because you have to be content with your lifestyle as is.
Since most people need to be saving more anyway, there’s no real excuse just to put the raise into your normal budget. It’s much better to treat it as “found” money that should all be going towards saving. Especially for her example person, who is only contributing 1% of her income to retirement. That’s inadequate by virtually any measure, and my advice to that person is to take up the Zen.
Discuss this on the Free the Drones Personal Finance forums.
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