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Decisions, Decisions: What Will You Do with That Big Raise?

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May 6, 2015
Decisions, Decisions: What Will You Do with That Big Raise?

An extravagant dinner out. A bespoke suit. A handbag from a luxury label. An impromptu jaunt to Hawaii. These are the sorts of temptations we all face when we earn a promotion that comes with a healthy salary increase. The essential question is: Should we give in?

Surrendering to the pull of instant gratification can be thrilling, and it might even feel justified after achieving your promotion. But spending it all now may not be as fun later on—when you’re forced to retire in a van (down by the river). When you’re promoted, it’s important to think about how what you do with extra money will affect you today and tomorrow.

Slice your pie before it’s served

You can start figuring out what to do with extra money before you even have it. Establish a plan you can easily put in place whenever you get a promotion. To build it, think in terms of percentages, distributing any amount of extra money among saving, spending, and splurging. It might look something like this:

  • 45% for investments
  • 40% for overall living expenses
  • 15% for celebrating your new status

This is just an example of what you could do with the extra income. The idea is to find a balance between these three areas that works best for your life. And while it might feel more practical to remove the third category entirely, make room for human nature—knowing that we all sometimes want to indulge. Specifying a percentage for the fun stuff will help you keep spending in check (the same way a designated cheat day helps keep a diet on track).

Make it rain—or save for a rainy day

You may also want to set different criteria for bonuses, whether they arrive on a regular or surprise basis, as well as small cost-of-living salary increases. In terms of bonuses, they can present you with an opportunity to enjoy what you’ve worked so hard to achieve. So you could use more of that extra money on wish fulfillment, like that trip to Spain or home theater upgrade you’ve been planning. When it comes to those wee raises, the opposite approach may prove more helpful. These increases are unlikely to make a difference in your everyday spending, so think about automatically adding those extra amounts to your investments.

Again, by considering all these possibilities now, you’ll be better equipped to know what to do with extra money when it arrives, acting as rationally as you can.

Ambition Pays

How could investing your extra money sooner help you? Find out by using our Time Value calculator. The Time Value calculator can help you estimate the future value of an investment based on different rates of return.

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