Use Your Raise To Increase Your Savings

Many consumers insist that, after they pay the bills, there is usually very little money left over to increase your savings and investments. And, in many cases, this might be the truth. It can be difficult to find the money to put aside for a rainy day when you have groceries to buy and other more pressing expenses.

However, there is one way that can increase your ability to save: 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.

How Your Raise Can Result in a Bigger Savings Account

Raises and bonuses, rather than being seen as an excuse to indulge in lifestyle inflation, should be seen as opportunities to boost your savings. This includes your retirement savings, which are usually in the form of tax-advantaged retirement accounts. Anytime you receive a raise, devote a percentage of it to your savings efforts. Use Your Raise To Increase Your SavingsThat way, you don’t have to cut spending. You don’t see much of a change in your lifestyle, but you will see a positive impact on your nest egg.

One of the best strategies is to put a portion of your raise into your tax-advantaged retirement account. 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 is to contribute it to your RRSP so that you truly get to save or invest every dollar of that raise.

Here is an example of how this scenario might work: 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 to your 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!

You don’t even have to put the entire amount of the raise aside. If you get a raise, and put even three-quarters of it into an RRSP or some other savings vehicle, you could boost your savings by quite a bit, and you wouldn’t even have to reduce your current lifestyle to make it work.

Avoid Lifestyle Inflation

The real key in this case is to avoid lifestyle inflation. If you increase your spending and regular expenses with each raise that you get, it really is impossible to save more. Instead of spending more over time, channel the extra into your savings.

Ask yourself if you really need to add more expenses to your life. Does it really make sense to tie yourself down with more obligations — just because you make more money? Or does it make more sense to keep living the same lifestyle while creating a more secure financial future?

This doesn’t mean that you can’t have a little fun, or do something nice when you get a raise. It makes sense to use some of it now. But your best bet is going to be making the “fun” spending temporary, and committing to savings for the long term.

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you! You can also follow me on Twitter for all the latest posts or to send me any comments or questions!

7 Responses to Use Your Raise To Increase Your Savings

  1. 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.

  2. I got a raise a while back and for my ledger tab in the spreadsheet I use for tracking, I now have a line specifically allocating the net amount of the raise, and it gets distributed to various savings goals we have at any one time.

  3. All well and good but ignores the fact that some of that money is needed to cover inflation, particularly if you are looking at the standard cost of living increase.

  4. A raise for most people is like winning the lottery, we just can’t wait to lay our hands on the money and start spending it. I do agree with you though, treating raises as if they never happened and putting that money into savings/investments would push our financial agendas further along.

  5. When raises happen, if any at all, they are mostly used in buying more happiness through buying of several things we always wanted to do. To use the raise for saving entirely needs too much prudence, which I believe I’m not. However, I’ll keep your suggestion in mind.

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