Getting a raise is a very exciting time for all of us. We start picturing all the new things we can purchase or do with our newfound wealth. We can increase our lifestyle, buy more things, give more away, and the list goes on. We financial advisers certainly get asked the question constantly of what people should do with their raises. Good news for you: I am quite opinionated here and have seen this play out thousands of times.
I call it the holy trinity of getting a raise, as I believe there are three things we should do any time you get a meaningful raise. I won’t speak to percentages, as that is pretty specific to one’s unique circumstances. However, I will suggest you put real resources into three buckets.
Holy trinity bucket #1: Investing
Shocker to hear me say this, right? Well, the reality is most of us need to invest more. Furthermore, if we spend every extra dollar we make, then we will fall into lifestyle creep. One day, you will wake up, saying, “I don’t get why I can’t afford my lavish lifestyle in retirement.”
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The simple answer is if you are still saving at the rate you were when you were making $50,000 a year and now you are making $300,000 a year, it seems obvious what the issue is. I highly recommend you take a healthy portion, ideally at minimum a third, and invest it for your future. This can mean increasing your 401(k) contributions, maxing out Roth or traditional IRAs or even starting/increasing investments to a non-retirement investment account.
Holy trinity bucket #2: Savings
I am a big fan of building up that emergency fund. Chances are you want to have a good slush fund both for emergencies or whatever that next big purchase may be — a new car or windows, perhaps. These can require a healthy down payment, and if you are able to increase your monthly flow to your savings accounts, it creates a larger, much-needed buffer between your future retirement savings and your current living expenses. I’m a big fan of trying not to touch your investment accounts unless you absolutely need them. If you can instead plan accordingly to save for each expenditure separately, then your future savings you will be in a great position.
Holy trinity bucket #3: Spending
All work and no play makes Jack a dull boy, as Jack Nicholson’s character in The Shining said. Besides that movie scaring the living heck out of me as a kid, it comes with a great lesson. You are indeed working hard and want to reap the rewards of your labor. If all you do is work hard and save more, life will be, well, quite dull. Go take a chunk of your new cash flow, assuming you aren’t way behind the eight ball, and spend it on whatever your heart desires. It can be driving nicer cars, doing more family vacations, buying a bigger home for your expanding family or, honestly, literally anything you want to spend it on.
I never judge what people spend their discretionary dollars on. Rather, our job is to make sure you are spending the appropriate amount of money on yourself to sustain your lifestyle. Literally, everything else you spend on is irrelevant. I want my clients and friends to live as fantastic a life as I do. I also, however, want to make sure that they are spending responsibly. That said, if you at the very least break my holy trinity into equal thirds, you should always be in a great financial position.
Final thoughts
One of the things we spend a lot of time working on with our clients is getting things like this calibrated just right for each client. It is like baking a cake with a lot of recipes. Too much of one thing may seem harmless until you realize that vanilla extract, although it smells incredible, should be used very sparingly, or your cake will not taste great. The same general philosophy works with finances: The measurements don’t have to be exact, but they should be pretty close so that you get the desired outcome. Our advice comes with the advantage of fancy, expensive software combined with decades of real-life experiences.
As always, stay wealthy, healthy and happy!
Diversified is a registered investment adviser, and the registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.
Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax advisor, accountant, or other professional concerning the application of tax law or an individual tax situation.
Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
Related Content
- When Investing for Retirement, Be Like Rip Van Winkle
- Four Things That Impact the Financial Plans of Every One of Us
- Nine of the Biggest Regrets I See as a Financial Planner
- How Average Is Your Net Worth?
- Being Rich vs. Being Wealthy: What’s the Difference?
-
Average 401(k) Match: Do You Work for a Generous Company?Here is the average 401(k) match and the top 20 companies as measured by their match policies. A generous 401(k) match provides a more secure retirement.
-
Should You Start a 'Trump Account' for Your Child?"Trump Accounts" for kids is part of the One Big, Beautiful Bill that was just signed. Look at if it's worth it for your children.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the SidelinesForget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
Can You Be a Good Parent to an Only Child When You're Also a Business Owner?Author and social psychologist Susan Newman offers advice to business-owner parents on how to raise a well-adjusted single child by avoiding overcompensation and encouraging chores.
-
How Advisers Can Steer Their Clients Through Market Storms (and Strengthen Their Relationships)Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial IssuesMany caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?
-
Cash Balance Plans: An Expert Guide to the High Earner's Secret Weapon for RetirementCash balance plans offer business owners and high-income professionals a powerful way to significantly boost retirement savings and reduce taxes.
-
Five Things You Can Learn From Jimmy Buffett's Estate DisputeThe dispute over Jimmy Buffett's estate highlights crucial lessons for the rest of us on trust creation, including the importance of co-trustee selection, proactive communication and options for conflict resolution.
-
I'm a Financial Adviser: For True Diversification, Think Beyond the Basic Stock-Bond PortfolioAmid rising uncertainty and inflation, effective portfolio diversification needs to extend beyond just stocks and bonds to truly manage risk.
-
I'm a Retirement Psychologist: Money Won't Buy You Happiness in Your Life After WorkWhile financial security is crucial for retirement, the true 'retirement crisis' is often an emotional, psychological and social one. You need a plan beyond just money that includes purpose, structure and social connection.
