What Should I Do With That Pay Raise?

Ross-shire Constabulary Pay Sheet 1863

Payraises old school style.

“Every luxury must be paid for, and everything is a luxury, starting with being in this world.”
–Cesare Pavese

“The saddest thing I can imagine is to get used to luxury.”
–Charlie Chaplin

You’ve done well at work the past year. It’s time for the boss to tell you what you’ll be making next year. The news is good. It’s a fat raise. Your paycheck will go up significantly.

What to do?

People who don’t think about their futures will blithely expand out their lifestyles to match the new paycheck. New clothes. New car. New TV. Nicer house.

That’s not you. You’re more self-aware and conscientious than that.

The frugal freaks would say that not only should you save every red cent of your pay raise, you should also cut your existing budget by 75%. You should only shower using recycled soap shavings, and every piece of clothing you wear should be stitched together from dryer lint.

Surely, there has to be a happy medium, right?

Isn’t a little lifestyle creep acceptable?

That you’re asking yourself this question belies something under the surface.

You’re not happy with where you are.

If you were happy with where you were, then you wouldn’t want something else. If you didn’t want something else, then you wouldn’t be asking yourself if it was OK to expand your lifestyle some.

It’s fine to feel that way.

But, before you start assuming that buying more things or doing more with your money is going to solve that missing piece in your life, you should examine why it is that you’re not happy with your life in the first place.

Why do you want something more?

There could be lots of reasonable answers. You want to buy organic food instead of processed food. You want to travel more. You need to upgrade your car because your beater is on its last legs. You have three kids and are living in a 2 bedroom apartment. There are a lot of perfectly reasonable explanations for why you might want to expand your lifestyle some.

For us, it was because we were unhappy with where we were living and wanted to move to a place that fit our lifestyles and desired activities and didn’t force us to drive 30 miles every time we wanted to do something.

But, don’t just assume that you have a justifiable reason for wanting the lifestyle expansion. Are you unhappy with something about your life for reasons other than what you’re spending money on? Are you simply spending money on the wrong things rather than not spending enough money? Is there a misalignment between what’s truly valuable and important to you and what you’re spending your time and money on?

Before assuming that you just need to spend more money to be happier, look a little deeper to see if there’s another, underlying reason for that desire rather than defaulting to lifestyle expansion. Once you get on the hedonic treadmill, it’s hard to get off.

Let’s say that the reason you want to spend more money is reasonable and justifiable. What then?

What to evaluate when deciding how much to expand your lifestyle

With the exception of moving into a more expensive place to live, most decisions to expand your lifestyle are not irreversible. In a pinch, you could dial back to a cheaper way of living, up to a point. You still need to eat, after all.

Why, then, must we concern ourselves so much with lifestyle expansion, if we can always reverse our decisions?

It’s because dialing down your lifestyle is a mentally taxing decision. Monkey Brain doesn’t want any of his toys taken away. For those of you who are new here, Monkey Brain is what I call the limbic system, the part of the brain that helped us survive when we lived in caves and chased woolly mammoths. Since we never knew if we’d live to see tomorrow, we tried to maximize the pleasure from today, not caring what the future brought.

In this case, once we introduce newer or nicer things into our lives, Monkey Brain gets used to it. He doesn’t want to let go of cable or of getting a new car every year. It becomes part of the routine, and like a government budget, it’s hard to cut back.

But, let’s say that our desire to expand is justified. Here’s what else we need to think about.

  • Are you saving enough for retirement? If your savings rate is below the minimum savings rate you need to be able to retire comfortably, then that’s what you need to concentrate on putting money towards. Even if you plan on working until you drop, that might not be the best idea.
  • Plan on needing more money in retirement to meet your increased expenses. If you expand your lifestyle and increase your budget, then you’re going to need more when you retire to continue the lifestyle that you’ve become accustomed to. So, while you might have been saving enough previously to reach your target retirement age, if you maintain the same amount of saving, it may no longer be sufficient.
  • Are you secure in your current employment? While none of us can be completely certain about the future and whether or not we’ll continue to have jobs (unless your job title is “Dictator for Life”), you know whether or not you’re doing well at work and if your employer is doing well. If you got a hefty raise, then chances are you’re pretty secure, but the question is worth honestly evaluating.

There is no right answer to the question. It’s a matter of tradeoffs. If you decide on lifestyle expansion without increasing your savings, then you’ll probably have to work longer. If you keep the lifestyle lean and mean, you may be missing out on opportunities.

It all depends on what’s important to you in your life and whether or not the tradeoffs are worth it for you. There is always an element of risk involved in deciding to increase your budget, but it’s a consideration you should be aware of, not one that you let drive your final decision. Instead, it should come down to whether or not that extra spending will truly make you happy and aligns with what’s important to you in life and if it’s worth potentially working longer as a tradeoff.

What about you? How would you spend a 15% raise? Let’s talk about it in the comments below!

Hull Financial Planning Winning With Money Course

The Winning With Money course offers 20 lessons, 8 worksheets, and several exercises designed to provide you with the answers you need to have certainty in your financial life. Stop spinning your wheels and take action!

About Jason Hull

Jason Hull is a Fort Worth financial advisor. Before becoming a Fort Worth financial planner, Jason co-founded, built, and sold a software development company. He is a CFP candidate, has a MBA from the University of Virginia, and a BS from the United States Military Academy at West Point. He is the owner of Fort Worth financial advisor Hull Financial Planning.

Comments

  1. It’s weird, but I feel like my Monkey Brain does not mind scaling back anymore. Maybe I’ve just gotten better at tricking him. But he does seem to like the positive reinforcement from blog readers who say nice things when we achieve a higher savings rate by dialing down the budget.

    Great points about the underlying reasons driving our lifestyle inflation. Better to deal with root causes than throwing money at the problem.

    • Once you get alignment between your priorities in life and your actions that underlie those priorities, then it’s not too hard to dial back on the unimportant stuff. Self-awareness goes a long way! Having a fan club certainly doesn’t hurt, either! :-)

Close