Avoid These 8 Money Mistakes When You Get a Raise

Avoid These 8 Money Mistakes When You Get a Raise

gradyreese / iStock.com Few things bring more joy than getting a pay raise, especially if you are struggling financially. As 63% of Americans live paycheck to paycheck, according to a November 2022 report from LendingClub, getting a raise is often seen as the answer to a better life.

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With a raise, you may think about dining out more often, going on more vacations, buying all the latest gadgets and even moving into a bigger home. But unless you have financial discipline, a raise can actually dig you into a deeper hole than you could imagine, as ironic as that might sound.

Here are eight tips on how to avoid common mistakes people make after getting a raise . ridvan_celik / iStock.com Falling Prey to Lifestyle Creep

Lifestyle creep is the tendency to spend more when you earn more. Whether you earn $2,000 per month or $10,000, it’s just human nature to end up spending all of that money every month. In fact, if your salary somehow jumps from $2,000 to $10,000 per month, it might not even take that long for your spending to accelerate to the point that you think you don’t earn enough money to make ends meet.

It is this instinct, perhaps more than any other, that you need to fight after you get a raise. Through a combination of wanting a better life and/or talking yourself into things that “you deserve to own,” it’s easy to end up spending as much as you make, or even more, no matter how high your income grows.

This is why, as astonishing as it sounds, U.S. adults with a net worth of $100,000 or more are the ones most likely to carry credit card debt, according to a 2019 study by Bankrate Credit Cards. Similarly, a November 2022 report by LendingClub found that 47% of Americans earning at least $100,000 were living paycheck to paycheck.

If you get a raise, you don’t want to end up in either of these categories. Shutterstock.com Failing To Increase Your Retirement Savings

One of the first priorities you should have when receiving a raise is to boost your retirement savings. Although it can be hard to pass up immediate gratification in exchange for a reward you might not see for 30 or more years, you’ll definitely thank yourself for the effort once you retire.

Right after you get a raise is the easiest time to increase your retirement savings, as in one sense it amounts to “found money” — you weren’t living on that additional money to begin with, so why not tuck it away and earn a return on it? You’ll also get tax advantages along the way, from a potential tax deduction on your contributions to tax-deferred growth on your investments. If your employer matches a portion of your contribution, that’s another source of “found money” that will boost your retirement nest egg. NiseriN / Getty Images/iStockphoto Maintaining Your Debt

Paying down debt should be among your top priorities after getting a raise. Debt is not only a drain on your current cash flow, it’s a growing cancer that can double in size in just a few years.

Use as much of your raise as possible to aggressively pay down debt so that you can then start earning a return on your money rather than flushing it down the drain to cover interest costs. mediaphotos / iStock.com Projecting Future Gains

From a financial perspective, it’s just human nature to project recent events into the future. If you got a 10% raise this year, it’s easy to expect getting 10% raises every year. While that would be a great scenario for your finances, it can cause problems if you immediately build that assumption into your retirement projections.

If you instead only receive 5% raises annually — or perhaps even none at all — you’ll end up far short of where you think you might be when you retire. Keep your retirement projections conservative, and resist the urge to project future similar gains to your salary. designer491 / Getty Images/iStockphoto Overlooking Your Emergency Fund

One thing that often gets overlooked after someone gets a raise is that their emergency fund could use a boost. You’ve likely heard the oft-quoted axiom that you should keep three to six months’ worth of money in your emergency fund, and perhaps even […]

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