A common reason given for not saving or investing is that there is no available money after all the bills and expenses are paid. By simply increasing your savings by the amount of your raises, you can quickly build up a nest egg without noticing any change in your lifestyle or spending habits.
Since your raise is taxed at your marginal tax rate (it may even bump you up to the next tax bracket), the best use of a raise would be in an RRSP so that you truly get to save or invest every dollar of that raise.
As an example, say you make $40,000 a year and get a 3% raise each year. In your first year, you would have an extra $100 a month that could go into TD e-Funds within your RRSP. What if you continued to live on the same $40,000 salary and kept contributing the raises into an RRSP for 10 years? If the investments were growing at 7% a year, in 10 years you would have an RRSP worth over $90,000!
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Tom Drake is the owner and head writer of Canadian Finance Blog.
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Good advice. Unfortunately, most raises go toward lifestyle inflation and not savings.
In theory the idea is great but as well as the problem Pinyo as mentioned about the using the raise to improve lifestyle it is also difficult to leave money untouched in a savings account since there is always something that needs to be paid for.