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Put Your Savings in Hyperdrive, Part 6: Make Your Raise Invisible

This article was written by in Saving. 8 comments.


This is the last installment of the series in which I offer a few suggestions for picking up the pace of your savings. For those not familiar with the concept of “hyperdrive,” the word refers to traveling faster than the speed of light, common in science fiction. This is the speed I would like my savings to accumulate, so I’ve compiled a few tips to help reach that pace.

In my company, there is a scheduled time that all employees receive information on their bonuses and annual pay increases — even if the answer is $0 to both. That time, coinciding with annual reviews, is coming shortly. This yearly event offers a great chance to accelerate savings. It comes down to how you handle the raise and bonus.

6. Make Your Raise Invisible. Your boss has just informed you that you will be receiving a raise of 3% and a bonus of $5,000, both taking effect in the next pay cycle. What is your first inclination? From talking with my coworkers, it seems to be common for the bonus and raise to be spent already. Anticipation of a pay increase seems to inspire spending ahead of time. Thus, it may make sense for many people to use the bonus and raise to pay off debt.

Since this is a series about saving, I am taking the position that no significant debt needs to be paid off. Your raise and bonus would go far to pay down high-interest credit card debt or a home equity loan. But if your goal is to maximize your savings, the raise and bonus can come in handy.

A general guideline is to increase your savings percentage by the percentage increase of your raise. That is, if you receive a 5% raise and you’ve been saving 10% of your income, increase your saving to 15% of your income. This means that your increase will be invisible to you and your budget.

Invisible raiseBefore-raise salary: $50,000
Before-raise 10% saving: $5,000
Left over: $45,000

After-raise salary: $52,500
After-raise 15% saving: $7,875
Left over: $44,625

This is an interesting number game. With this raise, you are earning $2,500 more than you were previously, but you are savings $2,875 more in the new year. By applying your raise increase percentage to your savings percentage, you’re actually saving a larger portion of your income. You are also reducing your left-over income after savings, but not by much (less than 1% of your new salary).

I’ve taken another approach in the past, focusing on retirement investments rather than straight rainy-day savings. I am not currently maximizing my 401(k) contributions, nor was I when I received my pay increase in prior years. When I received my raise each year, I increased my 401(k) contributions by the same percentage.

Whether you’re putting a larger percentage of your income in a high-yield savings account or a tax-advantaged high-yield fund, you’re making a good decision, but a larger deposit in your savings account will allow you to see your interest grow exponentially with each paycheck.

When it comes to the bonus, this is a no-brainer. As long as you don’t have debt, a lump sum deposit into your savings account can provide a boost towards your savings goal.

It’s quite possible, in an economic downturn or as a result of poor performance, that the raise offered by your employer is invisible itself. That’s a discouraging sign regardless of the reason. I’d suggest increasing savings, anyway, if possible. You’ll also be faces with increased prices. Your raise doesn’t need to match inflation, particularly if your expenses are lower than your income, but the government’s official inflation number is generally used as a benchmark for an “adequate” cost of living increase.

Most employees will receive some sort of increase this year. If you are one, you have the opportunity to get one step closer to hyperdrive by making that raise invisible.

Published or updated January 21, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar ChristianPF

I like your method – the first thing I want to do when I get a raise is spend the money even before I see it on my paycheck. I did that for years and have finally have gained a bit of discipline over the last few years.
I now apply similar principles to every raise – if you don’t allocate it, then your expenses will just rise to the new level of income.

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avatar Dave

I went thru this just the other day. And it was funny, as soon as I found about the raise from my manager my response was “time to tweak the 401k”. Heh, he is only about 10 years older than me but apparently he doesn’t think that way.

But unlike you Flexo, I focusing straight on retirement. So I try to do a bit of reverse engineering. Take my old salary, give myself say an “x” amount of dollar raise, and then try to push the rest into my 401k. And it takes abit of massaging since it’s not a direct correlation.

Anyone know of a calculator that would do that in fact?

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avatar Adfecto

Two different times in the past I have spent my promised bonus before it arrived. Huge problems resulted when the bonus never showed up. These two instances make the list of my Top 5 Dumbest Money Moves. Sure my employer “screwed me” but this situation isn’t really their fault. It will take multiple years of applying the bonuses that actually do materialize toward debt to get back to square one. Let my mistake encourage you to follow Flexo’s advice! Save your bonus or raise when it comes in and under no circumstances spend the money before it has hit your bank account.

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avatar Colin Joss

I like the salary raise calculation tip. My tip after the method above is applied, is to ‘forget’ the raise, and put them all in your savings.

Colin Joss
East Lothian, Haddington
United Kingdom

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avatar Luke Landes ♦127,480 (Platinum)

Dave and Colin: These are both excellent strategies and will pay off down the road.

Adfecto: Thanks for the affirmation!

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avatar Colin Joss

Flexo,

I think I am going to take your advice also following to adfecto suggestion, so it’ll pay off even better.

Thank’s

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avatar Margo

I’m feeling the pain of gas and groceries, and I already save quite a bit (20-25% of pay). My net pay increase is less than $100/mo each year, so I will probably use this year’s raise to pay for a gym membership.

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avatar Colin Joss

Margo,

If I may suggest a further perspective..

I don’t think there’s not a percentage limit of how much you should save, unless you would probably want to take it easy and spend it on paid health postings like the gym memberships.

Cheers

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