How Would You Spend a Big Pay Raise?

One of my ex-colleagues recently tripled his salary by jumping to a new company.

(Yes, that happens in today’s remote working environment. Live in a low-cost place like Malaysia, get paid in international dollars. Super happy for him.)

When we caught up recently though, he surprised me with a question:

“How would you spend a big pay raise?”

Great question.

A lot of personal finance material covers the harder part: “How to get a pay raise?” But if you’ve already gotten through that (congrats!), how do you deal with the suddenly larger numbers in your bank account? Without screwing up.

Perhaps something that’s not talked about enough, but something I’m happy to share my thoughts on.

Here’s what I do whenever I get a bump in my salary:

1. Celebrate!

Take the difference between my new take-home pay and old take-home pay and blow it on fun stuff.

For me, this is 90% buying nice meals for family and friends. Somewhere along my career, I picked up the practice of “New salary — food on me.”

That’s my thing. For me, belanja makan (how we call it in Malay) is close to the perfect way to spend money: You gather loved ones to eat together. Share new experiences in nice places. Spread the fruits of your labor around to make others happy. It checks multiple boxes on the “how to buy happiness” checklist.

Also a great opportunity to ask: “Pray for my success in my new job.”

Of course, for someone else, celebrating could mean buying a nice watch. Or handbag. The principle here is more important than how you do it:

Life is short. Celebrate your successes.

2. Re-allocate Your Budget According to Percentages

Okay, now that we’re done celebrating, it’s time to put the extra money to work.

To be clear, this means I only blow the extra money during Month 1 of my new salary. From Month 2 onwards, I do the below:

Take my new take-home pay, and split it according to my existing budget’s percentages. (This assumes you already have a working budget. If you don’t, feel free to check out my guide to budgeting here.)

For example, let’s say I used to take home $6,000 a month, with the below budget:

  • Home (40%): $2,400
  • Food (20%): $1,200
  • Giving (15%): $900
  • Investing (15%): $900
  • Others (10%): $600

If my new take-home pay is $8,000, I calculate the amount for each category using the same percentages. This gives me:

  • Home (40%): $3,200
  • Food (20%): $1,600
  • Giving (15%): $1,200
  • Investing (15%): $1,200
  • Others (10%): $800

An immediate question:

“But my home still costs $2,400. It hasn’t gone up by 800 bucks. Why do I need to budget so much extra here?”

Glad you asked, because now we get to the fun stuff.

3. Tweak Your Budget According To Realistic Spend

As you pointed out, the cost for your home probably doesn’t change much from month to month.

Yes, there’ll always be taxes, maintenance and repair costs. And yes, if your home loan is based on flexible interest rates, you pay more when rates go up.

The important thing though, is your home costs are not a fixed percentage of your income.

Meaning — assuming you use a percentage-based budget — when your income increases, you have two options:

  • Spend more on each category (e.g. buy nicer furniture, or save up for a bigger house)
  • Allocate more to categories that are important to you

Going back to our earlier example: I started with $2,400 for my home, and now have $3,200 — an increase of $800. I could say:

“I’ll allocate $100 more to upgrade my Internet, but keep other home expenses the same.”

This means I now have $700 extra to play with. And if I tweak each category using realistic spend, I might end up with a budget that looks like this:

  • Home (31%): $2,500 [Upgraded my Wi-Fi for $100/month]
  • Food (20%): $1,600 [Kept the percentage the same so I can eat in fancier restaurants]
  • Giving (15%): $1,200 [Kept the percentage the same so I can keep my conscience happy]
  • Investing (20%): $1,600 [Used extra money from Home to invest]
  • Others (14%): $1,100 [Used extra money from Home for a vacation fund]

“Why even start with percentages (Step 2) then, if we’re going to tweak each category?”

Well, percentages give you a good starting point — a guideline on how to spend your money. Like if financial advisers say save >10% of your take-home pay, and you’re only saving 5%, then you know you need to improve there.

Personalize your budget to what works for you, but keep it reasonable by referring to benchmarks.

4. Understand the Nuances of Big Salary Adjustments

The most obvious lesson from salary adjustments: how much you can save from the additional money determines how quickly you get to your goals — whether that’s buying a home or early retirement.

A couple of less-obvious things:

The secret to buying happiness is being intentional with spending

Every salary jump gives you flexibility to spend more. How you spend it determines your incremental happiness. If you mindlessly spend across all categories, it probably won’t make you much happier.

A better way is to keep costs reasonable across most things, but invest heavily into what’s meaningful to you.

As Ramit Sethi says: “Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.”

What’s small in percentage terms, can be large in dollar value

For example, let’s say you give Mom 10% of your monthly salary. (Well done, child.) At $3,000, that’s $300. At $15,000, that’s $1,500.

Maybe your mom only needs $800 for groceries, but the combination of high earnings + fixed percentage allows you to give her more. If you want to.

Higher levels of income give you power to influence the world. How will you use it?

Good budgeting allows flexibility in many ways

I once took a 52% pay cut to work at a social enterprise. It was one of the best experiences of my career, but I had to adjust to the much lower income.

Apart from my partner’s support and my low-appetite for luxury, it was budgeting well — scaling down my spending according to percentages — that helped me do it comfortably.

I hope it never happens, but even if I had to take another 50% cut tomorrow — I’m confident I’ll adapt quickly.

It can be easy to see budgeting as handcuffs. Constraints. I like to think budgeting well gives you enormous freedom to do cool things with your life.

5. Confront Your Emotions About Money

I’ve observed an interesting trait in some people who are already good with money.

They tend to question themselves. There’s fear:

“Am I saving enough?”
“Am I spending too much? I don’t want to fall to lifestyle creep.”
“Do I have too much debt? I hate owing money.”
“I don’t want money to change me. I don’t wanna become a rich asshole.”

Ironically, if you’re thinking about these things — if you’re worried about them — you’ll probably be okay.

Like how Einstein himself said: “The more I learn, the more I realize how much I don’t know.”

It’s the people who’re not thinking about their finances who run into problems. The fact you’re already worried tells me you’ll eventually figure it out. You just need a bit of time.

Finally, I want to tell you that you don’t have to fear your financial success. Like what this amazing tweet says: Don’t be ashamed either. Don’t feel guilty.

Money just amplifies who you already are.

I’ve always believed that the more you can separate your emotions from money — the more you can see it just as a tool — the better you’ll be at managing it.

But if you must feel something about money, let yourself be happy.

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Pic from Pexels: Skitterphoto

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  • If I had a big raise and I mean a really big one, I would see the dentist more often considering the fact how expensive dental care is even with insurance.

    I would put away more money in my IRA account and other investment accounts, so I would have a very, very large IRA account when I retire.

    I would be able to put away more money in my bank saving accounts in order to accumulate a very large emergency/living expense account.

    I would be able to buy more wholesome food to maintain my health.

    I would be able to save enough to go on a good vacation considering how expensive motel/hotel rooms are in the last 43 years.

    If I had a very large raise, my monthly social security check at age 62 would be in the 2,500 to 3,000 dollar range, so I get my money right there instead of waiting at 66 or 70.

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