Avoid Budgeting Pitfalls: The Wasted Raise

After your annual performance review, your boss agrees to a nice pay raise. It’s great news and you want to celebrate, so you decide to buy _______. After all, your raise will pay for it. Right?

Maybe, maybe not.

A pay raise is a reflection on your experience, work ethic, and ability to contribute to your employer. It’s nice when your employer notices your hard work and rewards you for it. But before you spend or make plans to spend this income increase, make sure you understand how much more you will actually be bringing home.

After taxes and contributions to your retirement plan, how much of this raise will you be taking home each paycheck?  Have any of your bills or expenses increased from inflation? Do you get a cost of living adjustment in addition to your raise? If not, your raise will need to cover any normal cost of living increases like rising grocery costs or an increase in your car insurance premium.

When you have a realistic idea of how much more disposable income this raise will bring you each month, you can decide how you want to spend it. Start by looking at your financial goals. Do you have student loans you want to pay off sooner? Are you saving for a down payment on a home? Achieving these goals will be much more meaningful than spending your raise paying off a credit card bill on an impulse buy.