Congratulations! You’ve just got a well deserved pay rise and you’re already contemplating how you can spend the extra cash. It can be so exciting to know you’ll have a little bit (or a lot!) of extra money coming in each month, but that can sometimes lead to a bit of overspending. Now there’s nothing wrong with treating yourself, especially if you worked your butt off for this pay increase, but once you’ve had your celebrations, it’s good to take a step back and figure out how this is going to impact your finances. 

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How Do You Calculate The Monthly Increase?

You’ve just got the confirmation that you’re heading for a 10% pay rise next month - great news! But what does that actually mean in terms of take home pay? A really handy tool you can use is the income tax calculator on the government website. As long as you know your income and pension contributions, it will give you a rough estimate of what your take home pay will be after tax deductions. From there, you can start planning with your new monthly income. Utilising a budget spreadsheet to plan out your new income can also be useful too.

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What Are Your Current Financial Goals?

First things to think about are your financial goals right now. Are you saving for a holiday or your first home? Do you want to start going to the gym but can’t fit that into your budget right now? Are you putting some money aside into a Stocks and Shares ISA and want to up your investments? Think about what is the most important thing for you right now and how this new pay rise can align with these goals. Say you’ll be getting an extra £200 per month, you could put this all towards a holiday fund, or split it between holiday and home savings, depending on what you’re prioritising.

That being said, with the cost of living crisis, you may just want to put the extra cash into your ‘fun fund’ or towards your general spending because let’s be honest, times are tight right now and you may want to give yourself a bit of extra wiggle room. Just be aware not to fall into the trap of lifestyle inflation. 

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What is Lifestyle Inflation?

To put it simply, lifestyle inflation is what happens when a person’s income increases and then, as a result, so does their spending. This can be easily done if you’re the type of person to avoid looking at your bank account, but wait eagerly every month for payday to roll around. That’s why checking in with your finances can be so important - by outlining your goals and combining them with your new income, you can reconfigure your budget to work best for you. That way, you can enjoy the perks of your extra income, while avoiding the cycle of overspending. 

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Don’t be afraid to reward yourself. Just make sure to think about your current goals, the long term and how you can make your money work best for you.