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The Simple Dollar

Got a raise? Spend it wisely.

If you’ve just received a raise, walk away from the temptation of lifestyle inflation, Hamm writes.

By Guest blogger / January 2, 2013

A January 2011 picture illustration shows a $100 banknote laying on $1 banknotes. A raise is an opportunity to genuinely improve your life over the long haul, Hamm writes.

Kacsper Pempel/Reuters/File

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A raise is something well worth being proud about. You’ve worked hard and your employer is recognizing that in the clearest way they can – with their cash.

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The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.

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The challenge is that when you get a raise, there’s a strong temptation to raise your spending right alongside it.

First, there’s the temptation to celebrate and reward yourself. You’ll tell yourself that you earned a goodie thanks to your hard work and you’ll pick out a nice splurge for yourself. However, that splurge takes away from other goals you might have and a big splurge often comes with costs – insurance, a data plan, and so on.

After that, there’s the temptation to live “a lifestyle matching your income.” You raise your expectations in terms of the places you eat, the vehicle you drive, and perhaps even the place you live.

The result? You find yourself right back in the same financial rut you were in before that raise, just with slightly shinier baubles around you. 

There’s a much better approach to this situation, one that can turn a raise into a lifeline to a better life.

The plan is simple. Figure out how much your raise increases your monthly take-home pay, then set up an automatic transfer to take that much out of your checking account each month.

In other words, you just continue to live on what you made before the raise. Meanwhile, the money from your raise is moved out of sight and out of mind, to be used at a later time for a well-considered purpose.

Don’t touch that money for a few months, then use it to take a big swipe at one of your debts. Don’t touch that money for a year, then use it to make an extra mortgage payment. Don’t touch that money for five years, then use it to make a large chunk of a down payment on a house.

Doing this changes nothing about your life. You’re still living exactly the same way you were before the raise. The only difference is now that raise is quietly working for you, building up and waiting for a chance to bring about permanent positive change to your life.

If you’ve just received a raise, walk away from the temptation of lifestyle inflation. Instead, look at a raise as an opportunity to genuinely improve your life over the long haul, because a raise can certainly do that if you give it that chance.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere.

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