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'Moving on up' in your career and your money

Nov 27, 2018 Read: 4 minutes

Unemployment has fallen to a near-record low, and companies are battling for fewer available workers. Many economists predict that wages are going to go up. If you're negotiating for a raise—or have already received one—you might find yourself experiencing "lifestyle inflation," in which your living costs increase alongside your salary.

It doesn't have to be that way. Setting aside your additional income for investment, retirement, or even just putting it in a savings account could move you closer to your long-term goals.

With a little careful planning you can continue to live on your old wage and save the difference, putting the extra money to work. If you're committed to ensuring that your next pay bump has a lasting impact on your wealth, here are three smart things to do:

1. Track your spending

It's easy to let raises slide through the credit card reader. That's where Chris McPherson, a social media manager based in New York, generally sees his extra money go.

“I make all my purchases on my credit card so I tend to go through a loop of debt that gets repaid," McPherson says. "It feels like, as I make more, life throws more expenses my way."

One way to avoid this pattern is to keep a close eye on expenses, says Neal Wadley, vice president of Westwood Wealth Management. “Have a financial plan in place to achieve your goals, pay close attention to your spending and budget, and resolve to stick to the plan," he says.

Begin by making a simple budget, even if you don't think you need one. This will provide a clear view of where your money is going and should be reviewed to make sure that your spending reflects your priorities.

"If you knew you could buy a nice house in a few years if you dined out a little less and looked for sales on clothing and other purchases, would you do it?" 

Neal Wadley, Vice President, Westwood Wealth Management

2. Make a plan!

The next step is to put that extra money to work.

“When you are young, time is your biggest advantage," Wadley says. “If you knew you could buy a nice house in a few years if you dined out a little less and looked for sales on clothing and other purchases, would you do it?"

This isn't to say that your entire raise needs to go into a home deposit or a retirement account. Denying yourself any enjoyment today and solely saving the extra money can be frustrating. So, if you have some shorter term plans, like going on a vacation to the Bahamas, make sure they're accounted for in your savings plan too.

“I generally recommend some sort of compromise," Wadley advises. “For example, you could use one-third of your raise to increase your 401(k) contributions, save one-third for a down payment on a home, and increase your living expenses by the remaining one-third."

If you're unsure how to allocate the extra income, consider having a financial advisor prepare a long-term cash flow analysis to determine how much you need to save in each bucket to achieve your goals. Or, if you want to do it yourself, there are several websites and apps that can help you determine your allocations and help you pinpoint what you need to reach your long-term goals.

3. Go big or go home!

Now is a great time to prioritize big financial goals and make smart investments to accelerate towards them.

The first step is to clearly define your long-term goals—retirement, buying a home, having a wedding, paying for a child's education—and see how you're  tracking towards each one. Then, with the guidance of a financial advisor, find investments that will help you achieve those goals and that match your risk appetite. Getting a raise could be the perfect time to revisit your long-range plan.

“You may find that you can increase your living expenses somewhat, take less risk with your investments and still achieve your goals," Wadley says. "Or you might save more for retirement, a home purchase, and other goals."

As any money expert will tell you, an effective financial plan evolves over time—and your next raise could be the motivation you need to revisit yours. "If you know exactly what you're working toward and have a road map to get there, it's much easier to stay on track and be disciplined," Wadley advises.

Alex Brophy is a Chase News contributor. His work has appeared in Business Insider and Yahoo among other media outlets.