Why the Smartest Thing You Can Do With a Raise Is the Most Boring
Getting a raise can feel like a reward for hard work and it's natural to want to treat yourself when that happens. But according to financial experts, the people who benefit most from raises often take surprisingly boring steps with it.
Here’s the smartest way to treat a raise.
Get Yours: 4 Ways Waiting for a Raise Could Cost You
You’re Innovative: 7 Low-Effort Ways To Make Passive Income (You Can Start This Week)
The Biggest Mistake People Make After Getting a Raise
Before looking at the smartest thing you can do with a raise, it’s important to look at the biggest mistake people make after getting a raise. The most common is lifestyle creep, where, as income rises, so does spending.
Sarah Newcomb, PhD, a senior behavioral scientist at Edward Jones, explained a concept known as“the hedonic treadmill,” which “is just a fancy way of saying upward changes in our quality of life quickly become our new normal.”
When this concept is combined with people’s cognitive tendency to see new money “as more available for discretionary spending than existing savings,” she said it lowers the perceived psychological cost of spending it.
"Put in simpler terms, we get used to a certain standard of living and a raise feels like extra money, so it's easy to think of it as an opportunity to upgrade our lifestyle,” Newcomb said.
This tendency is made worse by the fact that we live “in an instant society” where we’re “trained to live on what's coming in rather than budgeting what's going out,” she said.
The Smartest First Move for a Raise: Pay Yourself Before You Spend It
The smartest first move after a raise, according to Ralph Estep Jr., a licensed public accountant (LPA), founder of Saggio Management Group and host of the podcast Becoming Financially Confident, is to "redirect part of the raise before it ever hits your checking account. If you never see it, you never adjust to it.”
This doesn’t mean you buy things with it — it means you save more by “choosing the use that creates the most financial stability for you,” Newcomb said. That could be shoring up an emergency fund, adding to retirement or paying down high interest debt.
Mark Clark, founder and financial advisor at Prestige Advisors, added that if the amount of money you’re putting into savings “doesn't pinch a little,” you're likely being too conservative.
Why Automating Your Raise Is One of the Best Wealth-Building Habits
The safest way to make sure you do pay yourself first is to automate that savings.
Automating savings reduces “behavioral friction,” Newcomb said and Estep Jr. added that it “beats willpower every single time.”
"Automating the retirement bump, the savings transfer and any extra debt payment removes the decision entirely,” Clark said.
How Small Raises Can Turn Into Big Retirement Savings
Just because these steps are boring doesn’t mean they are low impact. Even small raises saved or invested consistently can produce surprisingly large results thanks to decades of compound growth.
Newcomb offered an example of someone earning $60,000 annually who receives a 3% raise each year beginning at age 30. If they consistently use half of each raise to increase their contributions into a tax-advantaged retirement account earning an average annual return of 7%, over a 30-year period, “the cumulative value of those incremental contributions alone could exceed $1 million by retirement,” she said.
Clark pointed out that the power of this approach “is a steady stream of contributions compounding over decades.” A raise invested consistently in your thirties outperforms a much larger sum saved late.
Yes, You Should Enjoy Your Raise — Just Don't Spend All of It
The experts recommend intentionally splitting a raise between future goals and present enjoyment, allowing people to avoid burnout while still building wealth.
Estep Jr. stressed the importance of capturing a full employer match if there’s one offered because it’s “free money and it's non-negotiable.” Beyond that, he recommended the 50/50 split: “send half of every raise to your future and let yourself genuinely enjoy the other half. All-or-nothing plans fail; balanced ones stick."
If you are going to spend that discretionary money, Newcomb said that research finds “experiential” spending is more satisfying than material purchases, such as sharing meals out or traveling.
Estep Jr. concluded that “boring is the whole point,” adding that, “You don't need to be dramatic with it; you need to be relentless about the boring stuff.”
Making these moves is what separates higher earners who steadily build wealth from those who simply end up with bigger monthly bills.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: