What to do when you get a raise at work?

What to do when you get a raise at work?

Congratulations on getting a raise at work! This is a testament to your hard work. You're probably thinking about what you can buy or do now, like getting a new phone or booking that long-awaited trip. While celebrating and treating yourself is important, it's also wise to be strategic. There are some steps you should take to ensure you're making decisions that strengthen your financial stability and avoid falling into the trap of lifestyle inflation.

What is lifestyle inflation?

Lifestyle inflation happens when a person's income increases, leading them to spend more. This might mean trading a perfectly fine car for a newer model, moving to a bigger, fancier apartment, or simply buying more expensive clothes and food because they can afford it now.

However, if the entire raise goes towards increasing your daily expenses, you won't have much left for anything else. So, try to resist the temptation of new expenses. People who spend their entire raise on bigger, newer, and better things can end up in debt. Ever wondered how you could end up in debt simply because you're earning more money? Here's an example:

Suppose that Marwan owns a decent car but wants a better one. With his current salary and available down payment, he can't secure a car loan. However, after getting a raise at work, his salary just about qualifies him for the loan after trading in his old car. Marwan purchased the new car, upgrading from a good to another good car! While his new car is newer, better, and possibly bigger, he now faces monthly instalments that strain his budget, not to mention the other costs that come with a newer or bigger car.

If you're satisfied with your current lifestyle, a raise shouldn't be an excuse to change it. Wait at least 2 or 3 months before making any significant decisions about your expenses. The key is differentiating between your needs and wants. If you can maintain your current personal expenses and standard of living, consider leveraging the raise to achieve your financial goals.

What are your current financial goals? 

How you handle your raise depends greatly on your financial goals. Do you want to save for a down payment on a house? Or start investing for passive income and securing your future? Maybe you want to learn new skills but can't afford the training costs. Consider what's important to you now and how the raise can help you reach those goals.

Calculate the net increase

If you've gotten a raise of 200 JOD, that doesn't mean you will actually get an extra 200 JOD per month. Some of this amount will go towards social security contributions and income tax. If you know the percentage of your contributions, calculate the deductions from the raise to get the net amount. This will help you plan your new monthly income more accurately.

It's time to adjust your budget

Now that you know your net increase, take this opportunity to review your monthly budget. Identify areas that need adjustment and make the most of the raise.

For example, consider increasing your credit card payment to pay off the balance sooner and pay less interest. You can also start or grow your emergency fund with some of the money. This way, you'll have funds available for unexpected expenses.

Don't forget about inflation

If you get a raise during a period of inflation, where prices of goods and services are gradually rising, it's important to consider how this affects your finances. For example, if you receive a 5% increase and the inflation rate is 4%, the increase won't give you much extra purchasing power. It will mainly help you keep up with rising prices and maintain your standard of living. Be mindful of this so you don't overspend, thinking you can afford higher expenses.

However, if your salary increase percentage is higher than the inflation rate, let's say you receive a 20% increase and the inflation rate is 3%, consider saving half for the future and your financial goals and using the other half for your current needs and wants.

Think about your future

How can you use this raise to grow your wealth and earn more money in the long run? The answer is simple: invest! Consider putting this amount or part of it into investments. When you invest, you not only earn extra income but also increase the value of your assets over time. Company returns and profits will grow, leading to higher stock prices and helping you maintain your purchasing power in the future.

There's another way to use this money to earn more money. If you dream of turning your hobby into a business, consider using the raise or part of it to start a new side project. For example, if you're a skilled pastry chef and want to launch your small business, buying pastry-making equipment could be a good idea. Or, if you're passionate about developing smartphone apps, consider using this money to enrol in a course to develop your skills and start your own freelance business.

Lastly, don't forget that you worked hard for this raise, so take some time to enjoy it and reward yourself. Buy those shoes you've been eyeing, or treat yourself to your favourite meal at a fancy restaurant. Just don't go overboard!

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