Skipping This After a Raise Could Be Why You're Still Living Paycheck to Paycheck
Getting a raise feels amazing, but before you break out the champagne or blow it all on fancy new hats, make sure you have all your bucks in a row.
Any time you receive a raise in pay, you should also increase your savings and investments right away to help yourself out in the long run. Simply put, if you don’t pay yourself first, your raise can quietly disappear, and cost you thousands (or more) over time.
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Yes, money is tight, and your future doesn't seem that much different from how it looked all those raises ago, so what's the big deal? Well, if you're increasing your cost of living each time you make more money, it’s basically a big fat financial wash. Here's the one thing people commonly skip when they get a raise, why it costs them later, and how to avoid this mistake.
The No. 1 Mistake: People Forget To Increase Their Investments
It's easy to forget to invest a portion of your raise because you've likely been waiting for it for so long. You've got plans, like that house, car or fancy vacation. You might have kids to put through school, or you might be trying to go back to school yourself.
That’s not to say those things aren’t important, but what's much more important is making sure you have an emergency fund, that you're getting out of debt, and that your retirement goals are being met.
For example, after a raise, most people naturally spend more, which is referred to as lifestyle creep by financial experts. Rachel Cruze, for example, warns against this type of inflation.
“All this really is is that as your paycheck grows over time, so do your expenses, and most working Americans experience gradual salary growth along with steady inflation throughout their professional career. Rarely does someone go from making $35,000 a year to $400,000 a year overnight. Now, if this were the case, the margin would be much easier to grasp because they were used to living on, you know, $38,000 or $35,000 a year. But what happens is that if it slowly goes up, it might be harder, and it is for some people to track and to manage as their lifestyle continues to increase,” said Cruze.
Even worse? If you keep your savings rate the same while earning more, you're effectively falling behind.
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Why It Matters: You're Losing Compound Interest
You're losing a ton of money by not earning interest on that increase in pay. That means you’re missing out on compound growth, tax advantages, employer 401(k) matches (aka free money) and long-term wealth building.
For every dollar you invest, you can potentially earn 12% on average on the stock market, per Ramsey Solutions. That means if you get a raise of $200 per month, and you invest half of that, you're making an extra $12 per month, just from the first $100 invested (12% annually is about 1% monthly).
Here is some math that is hard to ignore. In a year, that's $68 in interest earned. But over 30 years, that's a whopping $311,193 in interest earned.
But even more importantly, you earn interest on the additional interest you earn. That's what makes it compound interest. Basically, the more money you invest, the more money you make, and the more interest you earn on those higher dollar amounts.
How To Avoid: Increase Your Investments With Every Raise You Get
Increasing your investments with every raise essentially means adopting the mindset of paying yourself first. This way, you boost your automatic savings before you ever see the money. Remember, savings shouldn’t be considered leftovers; they are an important part of a balanced financial diet.
For every raise you get, take stock of your financial situation. What does this look like in real time? Here are a few suggestions to try:
Increase your 401(k) contribution by 1%
Set up automatic transfers to savings or brokerage accounts
Allocate part of your raise before it hits your checking account
Yes, you should treat yourself a bit, but also live below your means, and make sure you set aside a portion of your raise to reinvest in yourself.
It's a good idea to talk to your financial advisor to make sure your money is earning the way you want it to. So every time you get a raise, schedule an appointment with your advisor and revisit your finances. The last thing you want to do is find yourself at the end of the year wondering where all that money went.
Final Take: Why the Right Move Matters More Now
The bottom line is that in 2026, this strategy is even more powerful thanks to higher retirement contribution limits. For instance, according to the IRS, the maximum employee contribution limit for a 401(k) is $24,500, whereas the maximum combined contribution limit across all of your Traditional and Roth IRAs is $7,500 for individuals under age 50, and $8,600 for those age 50 or older.
That means you have more room than ever to grow your money tax-advantaged. It’s never too early to set your future self up with more than just anger at your past self. Even small increases make a big difference and significantly improve your financial position in the long run.
Joel Lim contributed to the reporting for this article.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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