8 Ways To Stay Frugal When You Get a Raise

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Congratulations on the raise! But before you start splurging on fancy dinners or shopping sprees, think carefully. “Lifestyle creep” can occur if you’re not careful. This is when people spend more as their income increases. Even though they’re earning more money, they still struggle financially because their expenses go up as well. This makes it harder to reach long-term financial goals like saving for retirement or paying off debt.

Being frugal doesn’t mean you can’t enjoy yourself, it just means making careful decisions about your spending. By continuing to live below your means, you can achieve financial stability and work toward the lifestyle you want in the future. The goal shouldn’t be to deprive yourself, but rather to use your money intentionally. Here are some ways to go about that.

Pretend You Didn’t Get a Raise

“This will seem counterintuitive to some, and be disappointing to others who want to be able to spend a little more cash,” says Julie Ramhold with DealNews.com. “But if you’ve been living comfortably on your current salary and there’s no real need to spend more, then don’t! If you treat the raise as if it didn’t happen, then you should be able to easily continue being frugal and prevent overspending in general.”

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Create and/or Reassess Your Budget

According to Snigdha Kumar, head of product operations at Oportun, creating a budget that incorporates your new income is crucial for financial stability. List all expenses and categorize them by priority, starting with necessary expenses like rent/mortgage, utilities and food. Then, allocate funds for discretionary expenses like entertainment and dining out.

Set Financial Goals

“Whether you want to save for a down payment on a house, pay off student loans or build an emergency fund, having a specific goal in mind can help you stay motivated and disciplined with your spending.” says Brian Meiggs, founder of My Millennial Guide. “Determine how much you need to save each month to reach your goal and adjust your budget accordingly.”

“Remember your ‘why,'” says Sebastian Jania, owner of Ontario Property Buyers. “There is a reason for saving, and by remembering how great your future self will feel, we can get a bit of a dopamine hit now.”

Automate Savings 

Automating your savings is an effective way to maintain a frugal lifestyle even after receiving a raise. Meiggs recommends setting up automatic transfers from your checking account to a savings account each month. This ensures that a portion of your income is saved before you have the opportunity to spend it. 

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If you don’t see the increase in your income, you are less likely to be tempted to spend it, according to Kumar. With automated savings, you can make saving a habit and work toward building a strong financial foundation for the future.

Automate Debt Payments

Automate debt payments along with savings and increase the amount of monthly payments to pay off high-interest debts faster. This will save money and help you achieve financial independence quicker. 

“Depending on the interest rates of your debt, your best investment may be to first pay off those balances prior to making any additional investments,” says Gerald Grant Jr., financial professional with Equitable Advisors.

Invest It

“If you’re savvy with investments, you can also take the difference between your pre- and post-raise earnings and invest it,” says Ramhold. “This can be a better way to make your money work for you as most standard savings accounts don’t have the best interest rates. You may want to speak to a financial planner before taking this step, or you can investigate options like high-yield savings accounts or CDs.”

“Increase your 401(k) or IRA contributions to maximize a raise,” says Sukhy Dhillon, brand director of e-Careers. “This reduces taxable income and helps you save for retirement.”

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Plan Ahead for Big Purchases

You deserve to celebrate yourself for getting a raise. However, it’s important not to go overboard. Ensure that any celebration or reward you choose is within your new budget.

“I once had a customer who won some money in Vegas and immediately purchased a motorcycle he had been considering,” says David Wilfong, founder of DavidWilfong.com. “The winnings were not enough to cover the cost fully, so the customer took out a loan to pay for it. This move resulted in increased living expenses without additional means to cover those costs, which is the opposite of responsible financial decision-making.”

“Whether it’s an epic vacation or buying a home, if you put [money aside for] a major purchase each pay period, then it’s a lot easier to live like you didn’t receive a raise and work toward something more meaningful than buying extra snacks on your next grocery trip,” says Ramhold.

Treat Yourself While Still Saving

If you want to maintain a frugal lifestyle even after receiving a raise, dividing your money after each paycheck can be a great strategy. According to Kayla Johnson, a financial planner at Corbett Road Wealth Management, a simple way to do this is to split your raise in half. 

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Use half of your raise to increase contributions to your retirement or investment accounts, and the other half on discretionary expenses such as dining out or entertainment. This way, you can build long-term wealth while still enjoying the benefits of your hard work. By balancing your short-term and long-term financial goals, you can avoid lifestyle inflation and continue to live a frugal lifestyle that aligns with your values.

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