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How To Save Your Next Raise Essay

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Save Your Next Raise

Saving a percentage of your salary is a great idea, but you can do more; save your raises. Saving all or a large chunk of your raise provides two big benefits:
• Your saving rate increases.
• You lower the rate at which your spending accelerates.

According to analysis from Payscale.com, college graduates receive their largest raises early in their careers. This gives young earners a great opportunity to save. It’s much easier not to increase spending, than it is to cut back on spending. Directing all or a large part of a raise into a 401k or other savings vehicle puts the money aside before new spending habits based on the higher income kick in.

Suppose Sara and Sam are each making $40,000 the year they turn 25 and both start out saving 5% of their salaries. They receive annual raises of 6% for the next 6 years. Sara saves 75% of each raise;
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• Sam saves $2,675, spends $50,852.57 and has $13,950.64 in total savings.
• Sara saves $12,146.77, spends 41,382.66 and has $41,259.56 in savings.
• Any income generated on the savings would increase Sara’s savings lead.

Sara has two big advantages in the race to retirement. She is saving more and her retirement nest egg will not need to be as large because her lifestyle is less expensive.
The avoidance of lifestyle creep is an important advantage that is often overlooked.

The fact that Sara is spending less also gives her more flexibility to deal with an unexpected financial hardship. If the economy hits a bad patch and they are each forced to take a 15% pay cut, Sara could save at a lower rate and leave her spending untouched. Sam would have to cut his spending by 10% just to meet his bills.

Of course the money saved by not spending raises does not have to be used for retirement. You can pay off your college loans or save for your child’s college expenses, save up for a down payment on a home or a down payment on that business you’ve dreamed of
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