An increase of household income is something that should be celebrated! Especially if you've recently been promoted. Congrats!
Aside from popping the champagne, it's also the best time to rethink your monthly budget and how it aligns to your long terms goals. If planned correctly, an increase in income can create a multiplier effect. Without proper planning, you could quickly find that you are spending more than you need or more than you make without even realizing it until you are dipping into your savings to make monthly bills.
THINK ABOUT IT! Have you ever uttered the phrase "if I could just make a little more"? I know I have. Often times when we make more, we also start to spend more. This usually starts to rear its ugly head only a month or so after the pay raise.
Below is WISE PACE's GUIDE to help you to keep your income windfalls as a CELEBRATION - not a curse:
Step 1: Calculate how much more you will receive in each month's paycheck from the pay raise. You can do this roughly by dividing the annual additional amount by twelve months. This will not be an exact amount because taxes have not been factored in. The important thing is to have a baseline of where to start. For example, your pay raise amounts to $10,000 annually. $10,000 divided by 12 equals $833.33 extra per month (taxes will probably bring that down to around $500 depending on your tax bracket). The $833.33 extra per month signifies money that was not needed in order for you to survive in the past (if you spend more than you make then that is a separate issue). Since it was not needed, you now have the freedom to assign it a job each month. (If you have already received a paycheck with your new pay raise in it refer to Step 3 for how to calculate)
Step 2: Assign the extra a job. This is probably the most important step. If you are not careful, the extra amount will be assigned a job for you generally in the form of more stuff. Let's be honest, most of us do not need more stuff. Now is a perfect time to assign it to a goal that you have been dreaming about. Some great examples are a home, vacation, or maybe even someone that you would love to help. It can even be used to save for a car that will be needed in only a couple years. The point is to have it work for you and not against you.
Step 3: Verify step one's calculations. To do this, look at your pay stub that reflects your pay raise. Subtract the new amount from the old amount. This will be your true extra amount per month because the taxes have already been taken out by your employer. The reason you did step one before step three is because it is very important to have a plan ahead of time. Without one, you increase your chances of temptation tempting you to spend it on something lacking true value to you. An example is new shoes that were not needed.
Step 4: Determine and automate where your extra money will go. Our brains want to operate on auto-pilot. They try to spend the least amount of energy as possible. So increase your chances of success by setting up an automatic payment to where you want the money to go, like a savings account. This will also help you to fight off temptation. Automatic payments can be set up through your bank. If for some reason your bank does not have this option, the same thing can be accomplished by immediately transferring the funds into your savings account as soon as you are paid. This will help to create a habit that functions somewhat automatically because it has become routine.
When all 4 steps are completed, you are on your way to being out of the vicious cycle of "if I could only make a little bit more". Your promotions will become more meaningful because the effects will last longer. The constant feeling of needing to catch up will begin to disappear. When deciding where to put the extra money, spend some time thinking about what you truly value. Knowing what is truly valued will help you from being deceived by an object wrapped in fools gold.
