If you are among the lucky few that recently received a pay raise or will be getting a pay raise this year, you are probably wondering the best way to put this extra money to good use. 

The most important thing to remember is not to increase your standard of living (expenses) to match your new income. It's amazing as I look back over the years and see how my standard of living increased to match (or sometimes, exceed) my income. If I was living comfortably on $30,000 a year, why couldn't  I continue to live on $30,000 as my salary increased. Just because my salary increased should not have meant that my expenses increased along with it?

Two years ago, I made a conscious effort to be sure that my as my salary increased, my expenses stayed the same or decreased.  If my expenses did increase, it was because I was sending more money to my savings accounts and not because I was taking on another bill to pay each month. 

If you will be getting a pay raise or recently received a pay raise, here are a couple of good things to do with the increase:

  • Debt Payments. If you have high interest debt you can direct the additional income towards knocking out your debt. Once you get rid of the debt, your raise will have have a double positive effect. You're income will increase from the raise and you'll have the additional money you aren't sending to your debtors. If you have a mortgage, how about sending that additional money in to knock down your principal and own your home a few years sooner?
  • Savings. Are your savings accounts looking a little skimpy? Direct the additional income into those accounts to fatten them up.
Don't use a pay increase as a reason to increase your expenses. Do you really need a larger house or a new car? Those things usually mean larger monthly payments. 

Don't get me wrong, I'm not saying you should not have a little fun with your money; but don't go overboard. Make it a one time expense instead of one that occurs monthly. 

Did you get a raise recently? What did you do with the increase?


  1. Money Honey SF // February 9, 2010 at 4:52 PM  

    My review is coming up and I doubt if there is a raise in the horizon. Maybe there might be since there was none last year. But I know what you mean when someone gets a raise and they have "lifestyle creep" and have the tendency to increase spending.

    If I was to receive a raise, I would pay down debt and maybe spend a bit of it to reward myself.

  2. Holy Mole // February 9, 2010 at 5:12 PM  

    Any raise I had was gobbled up by the 25% increase in health insurance premiums.

  3. Ken // February 10, 2010 at 6:19 AM  

    I actually was informed yesterday that I'm getting a pay cut. Nonetheless..you give great advice to someone who can wiesly use the MORE in their finances. Good post.

  4. Single Mom, Single Money // February 14, 2010 at 6:09 PM  

    I just started my new job so I don't expect a pay raise until next year. However, I plan to stat working OT (while the getting is good). I plan to put 75% towards savings and 25% toward debt reduction.

  5. Birthday Girl // February 17, 2010 at 12:49 AM  

    No raise for me this year, but anything I could get that was less than $60K would go straight to debt and maybe a little something fun.