It feels great to get a raise. It makes us feel like we’re being rewarded for all our hard work. It provides an incentive to keep doing a good job. And most of all, it puts more money in our pockets.
It can be tempting to start spending more money when we get a raise. Just a few extra dollars on each paycheck can make it possible to go out to eat once a week or start building up your wardrobe. But saving that extra money offers more long-lasting benefits, and it is relatively painless.
Think about it. You’ve probably been living on the pay you received prior to your raise for a year or so, and you survived that year. It’s not much of a stretch to be able to survive another year without that extra money. Of course you wouldn’t want to turn it down, but why not put it away to build an emergency fund, a college fund for the kids or a nest egg for your retirement?
And just imagine how much money you could save if you saved your raise every year. If you received the same percentage raise each year, you could put away over twice as much out of each check next year as you did this year. The following year, you could add a little bit more to it than you did the year before. As long as you can live on the same amount of money, you can increase the amount you save each year.
While you’re saving your raises, consider adding your bonuses to your savings as well. It’s tempting to go out and spend like crazy when we get a windfall of money, but it’s smarter to save it. Bonuses are money that we usually do not include in the budget, so we probably won’t miss them.
How to Save Your Raises
There are many ways we can put money into savings. But which is the best vehicle for saving raises and bonuses? That depends on your goals.
When it comes to practicality, you can’t beat investing in a 401K retirement account. 401K deductions from your paycheck are tax-free, and you will never have to pay taxes on that money unless you withdraw it before you reach retirement age. Many employers also match your contributions up to a certain percentage or dollar amount, so you’re essentially getting free money.
When you get a raise, you may be able to increase your contribution by the dollar amount of that raise. Or you might have to raise your contribution by a certain percentage. Your human resources department should be able to help you adjust your contribution to meet your goals.
Investing your raise in a college savings account might be a good idea if you have kids. Or you may choose to invest in stocks, bonds, or other investment vehicles. If you have more than one goal in mind, you might choose to divide your raise up among several savings options. If possible, consider having your contributions deducted from your checking account shortly after you get paid so that you’re not tempted to spend them.
If you’re looking for a way to save some money but can’t seem to make room in the budget, saving your raises could be the answer. Instead of adding the extra money into your budget, you can simply send it directly to savings and forget about it. In time, you can save up a substantial financial cushion.