Manage your salary increase wisely and guard against ‘lifestyle creep’

Whether it is a 5 per cent increase or a 20 per cent jump, a pay raise at work is an opportunity to take charge of your financial priorities.

A small raise might not seem like much, but over time, that difference in income could provide a boost to your lifestyle or be put toward other financial goals.

Whether you decide to pay off debt, pad your safety net, invest, give back, improve your quality of life or treat yourself, a raise is a good time to think about the direction of your financial life.

Many personal finance experts warn against “lifestyle creep”, which is when you begin to spend more as you earn more.

Lifestyle creep can take the form of buying more conveniences – such as ordering food in more often – or buying more expensive or higher-quality items, such as a better brand of skincare products.

“If you get a raise and use it to buy a new car or a new home or go out every weekend, your rate of spending might surpass your new income,” says Mabel Nunez, founder of the investing education site Girls on the Money.

Ms Nunez says it is good to reward yourself, but she advises clients to avoid buying more expensive things.

“Think about an expense that’s going to be a one-time purchase or something that’s going to make you better, like travelling somewhere new or taking a cooking class,” she says. “Don’t spend just for the sake of spending.”

Once you have looked at your financial situation, you might find that it is not in your best interest to increase your spending on non-essentials.

But if you are feeling good about the status of your consumer debt and savings, then you might choose to spend more money on things that will make life more enjoyable.

For example, maybe you have been washing dishes by hand because you do not have a dishwasher or yours is broken.

You could put part of your increase towards a new appliance that is going to save you a lot of time and energy.

Or maybe you have been driving the same car for the past 20 years or living in a too-small house with your growing family.

If you have planned for the increased costs, an upgrade that brings you increased functionality and comfort is a raise well spent.

Liz Carroll, a financial life and wellness coach at Mindful Money Coaches, says that paying off consumer debt with an 8 per cent annual percentage rate or higher should be a top priority, especially if you have more income that you can put towards it.

Beyond debt pay-off, Ms Carroll suggests people must try to have a financial safety net of at least a month’s worth of expenses, with the goal of working towards three to six months’ worth.

This could be done through regular recurring transfers from your pay cheque to your savings account.

“Give your future self a share,” Ms Carroll says. “I tell my clients to be mindful and pause before the quick reaction of: ‘I got a raise, now I can spend money.’ Instead, you should think: ‘What’s in alignment with my values?’”

Investing for retirement is another priority to consider. You could also consider an index fund, which allows you to invest in a wide range of stocks all at once.

“Learn how to invest it in a smart way, and it’ll get you to the next level of financial life,” Ms Nunez says.

Beyond debt, savings and other future financial planning, Ms Carroll says you should feel comfortable celebrating your accomplishments. Just keep in mind that you may want to put up some guardrails around the way you reward yourself so that you can maximise the financial benefits of a raise.

Ms Carroll says something that equals 5 per cent of the total increase is a good amount to aim for if you want to treat yourself but are also paying off debt.

If you do not have debt, she says, 10 per cent of the total raise is a good benchmark.

Another thing you may choose to do with your raise is to give back to your community.

Whether you donate money to your favourite charity or surprise a loved one with a random act of kindness, it can make you feel good to share your good fortune.