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Would a Raise Change Your Standard of Living?

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I recently met with my employer to discuss doubling my salary. I don’t have any news yet, but I got approval from my boss and her boss to take my case before the board who manages the money. Ironically, the following weeks still held a pleasant surprise for the Budget for Health household. My husband came home with a bonus and then this week, a raise! His company has been bringing in solid profits for the past few years and in return they give the employees a sizeable bonus. My husband’s salary was then increased by 3.9% to accommodate inflation. What did we do with this extra income? If you’ve been following me on Derek’s site or Budget for Health for any amount of time, you probably guessed right: it’s all going toward our savings for buying a home!

Our splurge moment

We just bought a new TV a couple weeks ago with the money we got from Christmas. After that expense, we didn’t want to splurge on anything else. We’re savers by habit (I learned a lot of financial lessons from my parents) and we would rather live simply. This means our “fun” savings most often goes towards doing something rather than having more things.

The bigger the box, the more you have to put in it

This saying works the other way around as well. If we keep accumulating stuff, we’ll need a bigger place to fit all of it! I know we’re young and things may change when kids come in the picture, but right now we are in a position to fit all of our belongings in a moving truck. Aside from packing, it took us a total of 3 hours to move to our current apartment. One hour to load, one hour to drive to our new home, and one hour to unload. It was wonderful!

Planning for budget cuts

When my husband and I decide to start a family, the plan is for me to bump down to part time at the most. If we raised our standard of living now, it would make life a little harder down the road when we’re forced to make cuts and re-learn to live on less (with more mouths to feed!). What we live on right now is a portion of my husband’s salary. Everything I make and the rest of his salary goes toward some sort of savings. We don’t act broke, but we’re only 2-3 years out of college and still have that very frugal mindset. We’re not rich, but we’re able to live richly with what we have.

How would you manage an increased salary? Would you change your standard of living?

If you want more great reading on finances, be sure to check out my recent articles from Women’s Money Week. Topics include (and are directed toward both genders):

Increasing Income- “My Recipe for Increasing Income”
Finding Time/Increasing Productivity- “How to manage 1440 minutes”
Family and Money- “Leave the Light on, Pay a Quarter”
Future planning & Financial Planning- “Everyone has a plan until they get punched in the face

This has been a guest post from Jessica. She is a Registered Dietitian and shares practical, useful tips on food, fitness, and finance. Be sure to subscribe to her blog, Budget For Health.

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

24 Comments

  1. I usually manage raises by increasing my 401K contribution and then adding more to my monthly savings. I leave some to go into my vacation fund too, so that I can take nice vacations every year.

    • That’s a great plan. My dad put his annual raise toward his 401k for the past 35 years. I think he’s got 25% of his paychecks going toward his 401k now!

  2. Just the beginning of this year I received a raise 10% from my salary. What I will do with this increment is to put it into my savings account. I have plan either to use for my future business or to invest in gold.

    • Congrats on the raise! I haven’t looked at investing in gold but I know Derek shared a post about it not too long ago. Did you see it?

  3. I would probably do the same thing I normally do when I came across an additional sum of money, splurge a little, invest some, and save some for my emergency fund. It’s true that when people starts to receive a bigger salary than they are used to, certain lifestyle changes take place, but we must always bear in mind that nothing is ever permanent in this world and we need to make sure that we are ready in case the change does not favor us.

    • That’s a good way to diversify. We can’t prevent speed bumps in life but Murphy’s law tends to apply less when you’ve got savings for emergencies.

  4. Good luck on getting that raise! That would really be huge and would definitely make things a lot easier for you. I’ve gotta agree with Jon up above, I tend to do the exact same thing as him when I get a raise: plow it into the 401K and the rest goes into the investments, emergency fund and vacation fund. Good luck again!

    • Thanks, Brian! It would make my schedule a little easier to predict although I do enjoy the variety I get from having multiple jobs.

  5. Congrats and good luck! I recently graduated from school and doubled my salary as well. We actually lowered our lifestyle by moving into my parents basement to save money. We recently started construction on a new home though, and that is our only change in lifestyle. The rest of the difference in income is going towards savings and paying down the mortgage.

    • Thanks, Nick! Of my husband’s 4 siblings he is the only one who didn’t move back in with his parents after graduating. The job market was tough on everyone! It sounds like yours is more of a temporary situation though as opposed to mooching off of parents 😉

  6. I think that if I got an increase in salary, I probably would live even more frugally.

  7. Whenever I received a raise, promotion or bonus, I always saved 50%. Although the increases are much less often, I would do the same.

    • I’m curious if you had that in mind before you got the raise? I know we can’t always predict when raises will come but having a game plan for what you’ll do with the extra income may be helpful and avoid impulse decisions.

  8. I save half for retirement and the other half goes to increasing costs. Of course this year when I saved half for retirement my paycheck went down… oh well!

    • Bummer! You took a paycut or your made less in general because more went to retirment? At least you’re more prepared for retirement!

  9. This year I received a 1.7% increase in my pay, and oddly enough, we managed to increase my 401k savings by 2% to get up to 12%.
    I’m hoping to do this for the next 4-5 years until we max are putting aside 30% of my paycheck. Being a single income household certainly doesn’t make it easy, but thanks to suggestions from Sam (over at Financial Samurai), I’ve been steadily bumping it up until it hurts.

    • Slow and steady seems to work well because you don’t feel the sting of taking big chunks out at a time by jumping from 0% toward retirement to 12%. I’ve read quite a few articles by Sam as well. I learned a LOT from Derek & Dave Ramsey 😉

  10. Excellent discussion of what the realities of a pay raise are. Thanks for bringing up many of the variables that many don’t even consider. Great post!

  11. I’ve gotten a few raises in the past year or so and we didn’t change a thing. The money all goes to savings and the budget stays as it is. We did make minor changes to the budget but it wasn’t because we were making more money. We are happy with our choices. Great post.

    • Thanks! I’m seeing a trend with these comments. I’m curious to see if anyone got a raise and DID raise their standard of living!

  12. Getting a raise doesn’t necessarily mean that you have to increase your standard of living especially if you are already comfortable with it. I think it would be best to invest the extra money or save it for an insurance or emergency fund. That is what I am actually doing.

    • You’re right. If you don’t have debt to pay off, raises make great opportunities to start up an emergency fund or invest. Thanks for reading, Felix!


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