A huge pay increase can — and does — happen. And when you get a job that pays substantially more than what you’ve been making, you may be wondering what the best way is to use this money.

In you’ve been living comfortably, your first intuition could be to spend and splurge, which is totally understandable. After all, you’ve earned that pay increase. In the long run, however, it makes more sense to learn how to use this additional income wisely in investment and savings. People who fall in the trap of always upgrading their lifestyles to fit the entirety of their income may be living on the edge of falling in debt at the first hit or crisis.

This doesn’t mean you should be content with your lifestyle and don’t have upgrades here and there. Having a higher living standard can be a reward for your hard work that led to the pay increase and set you on par with your coworkers and social network. While you’re making these upgrades, keep in mind the following.

Sustainability

Not all pay raises are sustainable. Some jobs may offer you an exceptional amount of money that you wouldn’t get somewhere else if you have to change job in the near future. It could be because of the exceptional needs of the employers or job circumstances.

In this case, you should not take this pay increase as a permanent status, and make upgrades that you won’t be able to maintain if you have to change jobs. Remember downgrading will be harder on you and your family. If you get yourself in long financial commitments, you would be stuck in a situation that you are unable to maintain long term. So be realistic about whether your extra income is likely to be there for years to come or not.

If the answer is no, use the extra income wisely in paying off debts or savings. These are the priorities that will have no negative future consequences. A splurge here or there in terms of making a major purchase, taking a dream trip, or the like is acceptable. What you will need to avoid is anything that will have payments spread over years to come.

Priorities

As mentioned, paying off existing debt should take precedence over anything else. But everyone has their own priorities based on the timing of this windfall — among other factors. For example, someone who is sending children to college may use their extra money to pay for tuition. In all cases, you may need to weigh your options, and the costs associated with each.

In short, make sure that you’re aware of how you can best channel the additional income. Taking it for granted can be easy, but if you miss getting your priorities covered, you may find that your additional income isn’t making the type of difference that you expect. Many people are amazed at how expenses can stretch quickly and swallow any additional income. That is why thinking carefully of ways that you can make the best of pay increase is that best route to ensure you get the utmost investment, savings or whatever other goal you’re trying to achieve.

Balance

It is not uncommon for people to plan too much to do with a significant pay raise, especially when the expenses are unplanned and unpredicted. For example, someone who is relocating to a new city with a bigger paycheck may think that the extra money will cover for a higher rent, better schools and ungraded car. With this approach and without planning, the result can be catastrophic, especially if these expenses are coupled with a sentiment that money isn’t an issue.

It doesn’t take much to tip the balance. In this scenario, a higher income actually puts the family at an increased risk of falling into debt or being unable to make ends meet. The key to maintaining this balance is to budget and take any additional expense seriously into consideration.

The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.

Optimising a pay raise

Think of your priorities

Pay off existing debt

Consider investment and savings

Don’t stretch yourself too thin

— R.O.