This post is part of Women’s Money Week 2012. For more posts about Budgeting see the Budgeting Roundup.
A raise, bonus, monetary gift, or other increase in income is certainly cause for celebration. But before you pull out all the stops at the nicest restaurant in town and pop the cork on the champagne think about how you can use the additional income to better your net worth rather than your lifestyle.
It is all to easy to justify eating out a few more times a week, spending a little more freely on clothes and items for the home, and booking a trip somewhere fun once you’re making a little more. But, and I know this will come as no surprise, it just leads to the same stress about money that may have existed before you received the additional money.
To avoid the “more money, more problems” scenario (this applies even if you’re not a rapper stocking your fridge with Cristal!) commit to not increasing your budget when your income grows. This might not be possible if you were really struggling to make ends meet before the increase, but assuming you were living comfortably before, here are a few ways to keep that budget in check:
- Set up an automatic transfer to savings for the extra amount.
Send it to short term savings or a Roth or Traditional IRA to save for retirement depending on when you think you might need access to the funds, but keep it out of your every day spending accounts. With it out of sight it should be out of mind and go towards building wealth rather than filling your closet!
- Apply the extra amount towards debt payments.
Tackle the highest interest rate debt first and work towards paying them off one by one. Paying debt off quickly can net you significant savings over years of making the minimum payments. Use this extra payment mortgage calculator to run the numbers and see how much you could save.
- Take a careful look at your budget.
Maybe there are some areas of your budget that will need to change somewhat. If you started a new job that is a little further from home you might need to up the amount you allocate to gas or transportation each month. Look for somewhere else you can save to make up for that increase. Could you start bringing your lunch a few more times a week, or cut back in some other area?