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548 days ago
4 Reasons to Save Your Raise

An Article Written by Levo

Congratulations on getting a raise! Whether it resulted from slick negotiation skills, changing jobs, or good karma, it’s an opportunity to celebrate. However, before you start dreaming of luxury vacations, new gadgets, or retail therapy, consider these options for saving and wisely spending that raise. Celebrate prudently now and your future self just might be experiencing life beyond today’s wildest dreams.

1. Lifestyle creep or lifestyle change?

For the first 13 years of my career I was a personal finance failure. I was extremely fortunate to attain regular raises and bonuses, but rather than take a long-term approach and put as much away as possible, I succumbed to the temptations of life in London and New York City. While my general policy is not to waste time on regrets, I do wish I’d saved more than I did. It would’ve meant forgoing some shopping trips and expensive nights out, few of which matter that much in hindsight. If I could have a word with my 20-year-old self, I’d encourage her (or maybe beg her) to put more money away each time she got a raise.

As I recently expressed in a Levo League article, consider “saving money as a gift to your future self for dreams that are yet unknown.” It was because I had savings that I was able to quit a corporate job in 2011 to embark upon a period of career discovery, which necessitated a significant drop in earnings.

If you dream of taking major personal or professional risk, now’s the time to start preparing. So, why not “pretend” that a large portion of the raise didn’t happen by setting it aside via an automatic transfer into a savings account with that specific goal in mind to keep you motivated? And, if you’re carrying debt, diverting your raise to paying it down will free up your cash in the long-term, along with the emotional burden that debt often brings.

2. Protect yourself from the unexpected.

Planning to minimize the effect of unfortunate circumstances isn’t always the best motivator. However, emergency funds, insurance, and other protections can help you sail through life’s challenging waters and keep bigger goals on track. Moreover, there is immense day-to-day psychological freedom to be attained from feeling—and being—financially solid. So, if you haven’t got the following protections, or if they could do with being stronger, why not use your raise to establish:

  • Emergency Fund: Depending on the level of uncertainty in your life, most experts recommend a fund of six to 12 months of liquid cash. Keep it separate from your other bank accounts to reduce the temptations to spend it unnecessarily (and don’t keep a debit card for the account!).
  • Life Insurance: While nobody likes to contemplate his or her mortality, the younger you are, the cheaper this is to obtain and if you have a spouse and/or children it’s an important step to help protect them. If your employer provides an option via your benefits package, look into that as a first step.
  • Identity Theft Insurance: This type of insurance is not front-of-mind for most of us, and yet the potential consequences of being a victim of identify theft and not being insured are mind bogglingly horrible. (It’s a whole other post, however just a few days ago I found myself extremely thankful that my husband had recently set this up!)

3. Plan for retirement.

Looking far into the future and imagining yourself much older isn’t the easiest, but it’s worth trying. I know I want to be doing more than just subsisting in later life-–I like to imagine my silver-haired self as someone with the financial freedom to donate time and money to important causes, as well as having the cash to travel the world.

For women, the issue of retirement savings is especially pertinent. Women generally live longer than men and tend to spend more time out of the workforce caring for kids or elderly parents. All of this often adds extra challenges for women saving for retirement.

If you’re allowing lifestyle creep to eat up your raises, you’re forgoing valuable opportunities to mitigate these challenges and set yourself up for long-term financial freedom. Furthermore, if you’re lucky enough to be working in an organization that offers an employer match for 401k contributions and you’re not maxing out that opportunity, you’re missing out on free money! So, if you’re not already doing it, get investing.

4. Turn the volume up on happiness.

If the three options above haven’t convinced you, here’s one last “dangling carrot” that might spur you into saving that raise. A recent Ally Bank study suggests that people who save tend to be happier than those who don’t. While it might be that happy people save more, I know from personal experience that focusing on building my savings and net worth (versus a myopic obsession with earning more) has made me much more content.

One final word—none of this is to say you shouldn’t enjoy a small splurge as a reward for your hard work. I know I would. Just do it consciously – spend on something you really want, something that will remind you of what you’ve achieved and make you happy every time you see it, use it, or think about it.

Setting boundaries and achieving financial goals can make those splurges all the more sweet!

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