Use Your Raises to Maximize Savings in a "Pay Yourself First Budget"

Saving and investing money is hard. That’s why so many people don’t do it. However, it is critical for your long-term financial health, so you need to not just develop that habit but increase your savings over time. Today’s post is about a twist to the Pay Yourself First Budgeting I recently wrote about (Pay Yourself First Budgeting: Build Automated Savings and Investment Into Your Budget) which will further increase your savings while at the same time giving you more spending money.

One of the great things about our careers is that you will often get raises. These raises can be a combination of ongoing wage increases at your company, financial rewards for strong performance or increased pay when you get a promotion or additional responsibilities. Whatever the reason for your raise, the increase in your compensation is an ideal way to both increase your savings and your disposable income. There are two steps to have your cake and eat it at the same time with raises:

Increase your savings rate when you get a raise

If you are using Pay Yourself First budgeting, you already have a line item for savings in your budget. What you’d like to do is to increase this line item disproportionately with your raise. Here are the steps to do so:

• Calculate your savings rate: This is simple math. Divide the savings line item by your total budget to calculate your current savings rate. It shows you how much of every dollar you earn you end up saving
• Allocate a larger share of your raise than your current savings rate to increased savings: Take a multiple of your savings rate — I use 2x — and add that percentage of your raise to the savings line item of your budget. For example, if your current savings rate is 11%, take 22% of your raise (2 x 11%) and add that to your monthly savings line item
• Update the automatic savings you’ve set up to fully invest the increased savings amount: Make sure to update the automatic savings you’ve previously set up as part of the Pay Yourself First budget to fully take advantage of the increase in your savings line item

By increasing your savings at a higher percentage of your raise than your current savings rate, you end up increasing your future savings rate so kudos for doing the right thing!

Enjoy the improved quality of life you can afford with the rest of your raise

The great thing about using raises to increase your savings is that you still get to increase your spending money. Unless you increase savings by 100% of your after-tax raise, you will still have money left over from your raise that you can use for discretionary expenses and an improved quality of life.

It’s rare in life that you get to have your cake and eat it too, but raises offer that opportunity — you can not only increase your savings rate, but also get more spending money.

This completes today’s post on maximizing savings in your Pay Yourself First budget when you get a raise. The practical steps you can start taking from today’s post are:

• Calculate your current savings rate: Simply divide your monthly savings amount by your total monthly budget to get your savings rate
• When you get a raise, increase the savings line item in your budget by a greater percentage of the raise than your current savings rate: Double your current savings rate, apply that percentage to your raise and then increase the savings line item in your budget by the resulting amount. For example, if your current savings rate is 11%, increase the savings line item by 22% (2x11%) of your raise
• Update the automatic savings you’ve previously set up with the increased savings amount: Ensure that the increased savings in your budget is automatically invested without ever getting into your hands
• Enjoy the rest of your raise: Enjoy the benefit of the increased spending power of the remainder of your raise

Thank you again for joining me on my journey to build financial literacy for young adults and their families. Please share any comments or questions that you have in the comments section. If you are interested in reading more of my posts, please access my author page (https://vocal.media/authors/sudhir-sahay) where you can see all the posts I’ve published. Also, if there are any topics you’re interested in my broaching in future posts, please let me know. In addition to the comments section, I can be reached at [email protected].