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Daily Money Shot: What to do with the extra money from your raise

Typical personal finance advice tells you that when you get a raise, you should not factor that money into your budget. You should use it for savings or funding your retirement or debt repayment. You should not adjust your standard of living just because you have more money coming in.

It’s good advice. After all, if we constantly adjust our standard of living in direct proportion to our increase in income we’ll always maintain the status quo. It’ll be hard to get ahead, and we won’t be as well prepared for our future or for emergencies. However, that advice isn’t always practical. There are several circumstances where it is necessary to incorporate a raise in your budget. Yes, it’s not the optimal choice, but there are times when we’re left with no other option.

READ: Daily Money Shot: Goals, not resolutions, for 2013

Let’s look at some of those circumstances:

Your expenses go up proportional to the increase in income. Let’s say, all at once, your mortgage, car insurance, gym membership and HOA fees go up. Most of those expenses are non-negotiable and if you don’t pay them, you get into a great deal of trouble. In this instance, your raise is virtually nonexistent and you need to use the money to cover these mandatory expenses. Yes, you can save money by canceling the gym membership or trying to negotiate a lower insurance rate but, for a lot of people, that’s not possible.

Your salary barely covers your bills. If you make minimum wage or you are struggling to pay your bills every month then a raise will give you a bit of breathing room. It’ll give you that cushion you need to feel a little less paycheck-to-paycheck. The raise might mean you’ll be able to stop juggling bills. You’ll be able to afford the necessities that you haven’t been able to pick up (like that new pair of shoes or the haircut). You might even be able to afford a few extras like the field trip fees for the kid.

READ: Daily Money Shot: Four questions to ask before deciding to live on one income

Something unexpected happens. And you need to pay for it on a monthly, ongoing basis. As much as we like to plan and budget, there are things that happen that we can’t prevent. Let’s say, for instance, you all of a sudden need monthly medication and doctor appointments to accompany it. Your childcare arrangement falls through and you need to use the raise to cover the new fees. Your grocery bill goes up because you have someone new residing in your house. There’s a host of events that can happen unexpectedly that, had it not been for the raise, you would not be able to pay for.

Whenever possible, it is advisable to use any sort of raise or increase in income as savings or some way of building a safety net. However, if you need to incorporate that money into your monthly budget, don’t feel guilty. It may not be the perfect scenario but if it makes getting through the month a little easier and less stressful, then go for it.

Readers, are there any circumstances where you would advice incorporating a raise or increase in income into your monthly budget?

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