Q&A: What To Do After Getting A Raise

Q: This is the year I finally got that raise! What should I do with the extra money?

A: Beyond the money, getting a raise is recognition that the work you're doing is valued. You're on the right career path!

Let's not overlook the money, though. The raise can boost your financial stability, or it can blow right through your checking account, leaving you worse off than you were before.

The difference between these two outcomes is planning. Without a plan to use your new bounty responsibly, it's difficult to resist the temptation to spend lavishly because you "deserve" it. Here are three steps to making a plan for your post-raise finances.

1. Stay off the treadmill

If you started at the bottom, you probably remember when you had few indulgences. As you pulled yourself up, you might have added the occasional luxury: better food, a nicer car or comfortable furniture. While the added luxury might have been a thrill at first, it soon became the new normal.

This is what psychologists call the hedonic treadmill: A greater salary brings greater lifestyle expectations. It's impossible to get ahead if you're always chasing the life you think you "need."

By raising your lifestyle standards with your new income, you're increasing the speed on the treadmill instead of making more progress toward your goals. To move forward, you need to spend prudently, not emotionally.

When your first paycheck comes in, avoid thinking about things you "deserve." Don't change the amount you spend on monthly living expenses. Going out to dinner to celebrate is fine, but buying a luxury car to reflect your new status is just running faster on the treadmill.

2. Fix the basics

If you don't have an immediate plan for your new bounty, consider putting your money in one of these three places: paying down debt, building an emergency fund and saving for retirement. They aren't flashy ways to spend your money, and they won't provide instant gratification, but they will ultimately make your life easier.

Depending on the timing of your raise, you may need to make some paycheck adjustments. It's smart to withhold a little extra in taxes as befits your new salary; if you don't, you may be unpleasantly surprised at tax time. That's another reason to make tax-deductible investments in your retirement accounts. You'll get to keep more of your raise!

3. Save for your values

Getting a raise is a great time to review your dream list. What would you do if money was no object? Take a trip abroad? Start a small business? Whatever your dream, you need some capital to pursue it.

Fortunately, you're about to get more cash each month. To reach your "money's no object" goals, simply save a little each month with your new monthly bonus. An investment in your future is one that always pays off.

Your Turn: What would you do with a little extra money each month? Let us know!

SOURCES:

http://www.nbcnews.com/business/personal-finance/so-you-just-got-raise-here-s-how-handle-your-n659151
http://www.investopedia.com/terms/h/hedonic-treadmill.asp
http://lifehacker.com/5291389/avoid-the-hedonic-treadmill-trap-if-you-want-to-be-happy
http://www.moneycrashers.com/things-do-when-get-raise/