Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
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.”
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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!
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