How to Adjust Your Budget After a RaiseCareer Success
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Hey everyone, Logan here, and if you clicked on this article then you probably got a raise and you’re wondering how to use that extra money. First of all, congratulations, that’s great, and second of all you’re in the right place.
If you follow my channel, you know I like to talk a lot about saving, and that’s important. But from a dollars and cents perspective, a penny earned is a penny saved. So if you get a raise of $100 per month, that’s basically equivalent to cutting $100 in your expenses. Now spending less and earning more are obviously two completely different things, but when it comes to your budget and your bank account it really doesn’t matter whether you save by earning more or buying less.
Of course, that also means that if you get an extra $100 in your monthly wages or your monthly salary, that’s going to be canceled out if you also spend $100 more than you were spending before. Now if that’s how you want to use your raise then that’s fine, I’m certainly not here to tell you what to do with your money. But at the same time, I know a lot of people who always spend whatever they earn, and that leads them to run into financial problems that could have been avoided if they saved some of the cash from each raise.
So in this article, I’m going to share a few of the strategies I’ve used to balance my budget after getting a raise so that it can make my life easier in the short term while also helping me reach those long-term goals that might not have been realistic on a lower salary.
1. Analyze your spending habits
Now hopefully you’ve already been budgeting, hopefully you already know how much you spend in the average month, but if you don’t know that then this is the perfect time to learn. If you’ve followed my Youtube channel or my content on the Money Done Right blog, you might be familiar with my basic approach to budgeting, and usually the first step is just looking at your recent statements to get an idea of where your money is going.
If you don’t know how you were spending your money before you got the raise, then there’s a good chance that you’re going to have trouble managing your spending levels now that you have more cash on hand. On the other hand, if you figure out how much you spend on different things, then you’ll have a good starting point for your future budgets.
So I would say it’s worth going through at least your last few credit card and bank statements. You might be able to do this with a budgeting app, but if you’d rather do it on your own then just write down the category for each transaction and see how much you’re spending on each category per month. Of course, spending isn’t always consistent over time. If you’ve been in quarantine, maybe you’re not spending as much on gas, so you might need to adjust those priorities later on.
Let’s say you typically spend $4,000 per month and you earn $4,500, then you’re saving $500 per month. So if your salary goes up to $5,000 a month, then you’re going to have another $500 cushion, and you’re going to have to make a decision about how much to save and how much to spend. But at least now you have that data on hand so you’ll be able to make a more informed decision about your saving and spending priorities instead of just automatically increasing your spending to match your new income.
2. Pay yourself first
OK, once you have an idea of where your money has been going recently, then you’ll have the opportunity to allocate the new cash from your raise and decide how much you want to save or spend on those different categories. This part is really up to you, I can’t tell you the right way to use your money, but personally paying yourself first is one of the best pieces of personal finance advice I’ve received, and even though it doesn’t sound like the most exciting way to use your raise I think it’s an excellent habit to get into.
If you’ve never heard the expression “pay yourself first,” the basic idea behind it is that you should switch your priorities from spending to saving. So a lot of people get their paycheck, they buy whatever they want to buy, and maybe at the end of that paycheck cycle they have a little left over to put into a savings account or something like that.
And obviously that approach works for some people, you don’t have to think about how much you’re saving, but at the same time it’s really easy to get to the end of the month without anything left over. On the other hand, paying yourself first means that you put savings above spending. So instead of saving whatever you have left, you take out whatever you want to save at the beginning and spend what you have left after.
Now whether or not you’re already using that strategy, I think it’s especially helpful in a situation where you just got a raise and you’re trying to find the right way to balance your budget. Again, the first response for a lot of people is “great, now I can buy X Y and Z that I couldn’t buy before.” And again that’s great, you’re definitely going to have the opportunity to spend more, but I would highly recommend waiting on that spending until you’ve had a chance to chart out how the raise affects your opportunity to save. So in the next few steps you’ll be able to make some adjustments, cover different areas of your budget in terms of both short-term and long-term goals, and then once those are taken care of you can start thinking about how you want to spend whatever’s left over after you’ve paid yourself.
3. Prioritize the extra money
Of course, you’re going to want to cover critical expenses like rent, bills, and any high-interest debt, particularly credit card interest which typically comes with very high rates and can be extremely hard to pay off. But assuming you don’t have any immediate financial obligations, I would say that you should look to save at least some of the extra money you’ll have on hand from your raise. I’ve talked a little about using extra money on my channel and in my writing at Money Done Right, but basically the first thing I would want to focus on is an emergency fund.
You’re probably not thinking about financial emergencies after getting a raise, but especially after coronavirus it’s clear that nobody can predict how their financial situation will change over time. You could lose your job later on, you could get sick, your car could break down—it could be a hundred different things, but the point is that you want to have some money to fall back on in case something goes wrong.
Personally, I would put all my extra money into an emergency fund until I had at least something like $1,000, then I would consider diverting some of my money beyond that to other goals while continuing to gradually build the emergency fund. Ultimately I recommend an emergency fund that can cover at least three months’ worth of your expenses, and honestly that’s on the low end depending on your job security, risk tolerance, things like that. But you don’t want to get in a situation where you spent all the money from your raise, something happens, and now you don’t have anything to cover those costs without ruining your budget.
If your emergency fund is all set, you’re OK on debt, bills, things like that, then you can go in a few different directions and start thinking about your long-term priorities instead of just focusing on what you can do with your money right now. For example, I’ve talked about Traditional and Roth IRAs on my channel, so make sure to check that out if you want to know more about those accounts, but basically they’re retirement accounts that come with some really helpful tax benefits that can give you an incredible return on investment. And depending on where you work, your employer might also have a 401(k) plan that you could invest in rather than going on your own with an IRA.
Retirement isn’t the only long-term financial goal you could have. You might be saving for a house, maybe you want to pay your child’s tuition or buy a car, but the point is that once you’re debt-free and you have money for emergencies you can start to approach those big goals. And the more you’re able to set aside from a raise, the more quickly you’ll be able to get there.
If you got a raise then you’ve clearly been living on your old salary. That doesn’t mean you have to always have the same spending habits, but you might have the opportunity to spend a little more here and there while also making more progress on your savings. So I really want to stress how important it is to put spending at the end of this list of priorities rather than the beginning, at least assuming that you were able to cover all the essentials on your old budget. Again that’s not to say you should stop yourself from spending more, it’s just important to adopt that long-term mindset and put your extra money toward the things that are really important to you.
4. Allocate spending
I know budgeting is a lot of work, it might not seem worth the effort if you’re new to the idea, but if you’ve made it through these steps then whatever money you have left over will be yours to spend. That’s going to be a judgement call on your part, whether you want to hold back and save most of the difference or go ahead and spend the majority of your extra cash, but either way it’s important to allocate that spending deliberately.
This is another adjustment if you haven’t budgeted before, but even if you want to spend your entire raise I still think it’s worth taking some time to see where you actually want the money to go. And personally, when I lay my finances out in terms of real numbers, I start noticing all the ways I tend to overspend.
In fact, most Americans don’t actually know how much they’re spending. If you’re spending $500 a month on delivery, you might not even notice if you don’t have a budget. But if you look at your statements and chart out how much you want to spend on different things, then you’ll realize where your money is going and you’re probably going to be motivated to adjust.
Now you’re going to have some initial goals based on your past statements and spending patterns, and it’s important to try to stick to those whenever you can so that you can hit your savings goals. But at the same time, it’s hard to predict what you’re going to need or want in the future, and you don’t need to keep hard and fast category limits if they aren’t working for you.
So right now you’re probably spending less money on transportation and travel, on the other hand maybe you’re spending more on take out, video games, streaming services, whatever. And if your lockdown ends or something else changes, you need to be ready to adjust your budget and make sure it always represents your current priorities. But just getting started is the most important step because then you’ll have a framework where you can track your spending month to month and see what needs to change over time.
All right everyone that’s all I have for you today, it’s a great feeling anytime you get a raise, and I hope these tips will help you get the most out of that extra money. I know some of you are in situations where a raise is going to help you live more comfortably now, and on the other hand some of you might be mostly satisfied with your current budget and maybe you can put most or all of that cash into savings.
Either way, I think it’s really important to be deliberate about how you use your money, especially when you get a lot more of it and your first impulse might be to spend it right away. Now everyone has their own way to budget, what works for me might not work for you, so it would be great if you could leave your thoughts in the comments if you have any experience budgeting after a raise. As always thanks again for reading to the end, I really appreciate it, and I’ll see you next time.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.