So you just got a well-deserved raise. Congrats! Your next instinct is probably to start thinking of all the things you can finally do with your newly padded paycheck, like moving into a nicer apartment or taking that long-overdue vacation.
But earmarking every one of those extra dollars for something fun before you’ve made a bigger-picture plan for your money is a common pitfall. Yes, you’re allowed to treat yourself — but you should also ensure that you’re making progress on other goals. Here are some other common mistakes people make when getting a raise, and what you can do to avoid them.
Mistake No. 1: Succumbing to Lifestyle Inflation
Lifestyle inflation is the idea that as you make more, you spend more. For some people that means eyeing that new home or luxury SUV before the pay raise even hits. But if all your income is going toward growing your “permanent” day-to-day costs, you’re not leaving much on the table for anything else. So resist the temptation to take on new or bigger expenses. Ideally, you’d continue at your current standard of living while socking away any extra money toward the occasional splurge and meeting long-term money goals.
Mistake No. 2: Forgetting About Retirement
If your salary has increased, in theory so should the amount that you set aside for retirement. But many people forget to show love to their retirement account when they get a raise. If you have an employer 401(k) match, then, at the very least, make sure you're contributing enough to maximize it. If you have positive cash flow (i.e., you spend less than you make) and feel behind on retirement, you could increase your contribution amount by the same percentage as your raise. Get a 3% annual raise? Then boost how much you contribute to your retirement account by 3%, too. You can also take advantage of any auto-escalation features in your 401(k) plan, which can automatically increase your contributions annually or whenever you receive a raise.
Mistake No. 3: Not Taking Care of Debt
The logic is pretty simple: Try to take care of your existing bills before you add on new ones. If you’ve got credit card debt, student loans or other balances that weigh heavily on you, consider allocating part of your raise toward paying them down more quickly, provided you have at least one month of expenses set aside in an emergency fund (without one, emergency expenses can lead to more debt).
You might be tempted to put off paying down debt in order to invest your extra take-home pay, but that might not make sense if you have high-interest debt. For instance, if you invested in the markets, you could hypothetically see between a 5% to 7% annual return over the long run on your money — but if you have high-interest credit card debt you’re likely *paying* an annual percentage rate of 19% or more on your balances. In this case, it would make more sense to pay off that expensive debt before investing.
Mistake No. 4: Forgetting About the Trade-Offs That Come With a Raise
Making more money is great, but usually a bump in pay comes with an increase in responsibilities or expectations: longer workdays, more travel or being on call more frequently, for example. Are these things worth the bigger paycheck to you? Will you actually be making less per hour because of your longer workdays, or will you no longer have time for a side gig that you love? If there are as many cons as pros to consider, you may want to chat with your manager to discuss your concerns before deciding to accept.
Mistake No. 5: Assuming the Pay Raises Will Keep Coming
Raises usually come in spurts — you might see a big jump in salary one year after getting a promotion or switching jobs, or you might experience several smaller bumps, depending on how long you’ve worked at your company and where you are in your career. So don't assume your income will increase as substantially every year as it did this year when you’re doing future planning. This is also another good reason to keep lifestyle inflation in check — you never know when your salary trajectory will level off, or even drop, depending on your life circumstances.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.