Wednesday, 30 March 2016

You've just gotten a raise, and you're tempted to spend it. That's understandable. Whether your raise comes from a promotion, a merit increase, or a cost-of-living adjustment, you can be proud that your work is valued. But financial experts say that you'll reap far more benefits if you opt to keep your lifestyle and spending habits the same even when you earn more.

Saving the extra money in your paycheck doesn't just make financial sense. It also may help you gain personal and social rewards. In an interview via email, Thomas Nitzsche, an Atlanta-based certified financial educator, points out, "It's a perfect opportunity to start or increase your contributions towards your goals," whatever they may be.

A boost to the bottom line

Sometimes the financial rewards are immediate, notes Nitzsche, a financial educator at ClearPoint Credit Counseling Solutions. If you take the raise and contribute to a tax-deductible retirement plan — and your employer matches contributions — you can see a real jump in your savings over time. Some states also offer a tax deduction for college savings plans, and within certain limits, your contribution to an IRA is tax deductible.

"Aside from savings, funds from a raise can be used to save you money by paying down debt faster and reducing the total interest that you pay on credit card debt or student loans," says Nitzsche.

The key is to make saving automatic. "Pay yourself first," says Nitzsche. "Making contributions for retirement or college savings, a vacation, holiday gifts, or an emergency fund through a paycheck deduction or direct deposit can afford the added benefit of (being) 'out of sight, out of mind.'"

Psychological rewards

Nitzsche points out that using your raise to reduce your debt not only allows you to save money on interest and have more funds available, but it can also provide you with peace of mind.

"Living beneath your means alleviates stress and fosters confidence in the event you have a sudden decrease in income," says Nitzsche.

Social and professional benefits

As the personal-finance website noted in an article, having money saved also can you give you a tremendous sense of freedom. Having money in the bank gives people more of an ability to explore and pursue their dreams.

If you're dissatisfied with your job, you may feel less stuck if you have money saved. It might mean you can afford to launch a second career that would be more fulfilling — but would require a pay cut. You also would have the flexibility to spend money on memorable experiences, such as a splurge vacation you've always wanted to take. And, you also could give generously to charities and people in need.

Recent studies show that having the money to do such things can give you a greater sense of meaning. So when you get your raise, save it—and you will discover some profound benefits.