Make your next raise really pay off

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the ongoing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

In theory, a raise is great. But if you're not careful, that fatter paycheck can make you feel like you just got a green light to go shopping.

I should know; I've landed a new project and not even waited for my first paycheck to arrive before spending it. Sigh.

If a seasoned money writer like myself (ahem) could make such a dumb money blunder, naturally I was worried when I heard that the two youngest members of the Women in Red also came into pay increases.

Two 20-somethings suddenly endowed with extra cash may not sound like a national emergency. But if Lyndsey and Stephanie (and you, too!) want to get the most financial benefit from those raises, they need to strategize.

The long-term potential

Negotiating for raises -- and using them wisely -- is especially key for women, says Linda Babcock, Ph.D., and Sara Laschever, co-authors of "Women Don't Ask: Negotiation and the Gender Divide."

Based on their extensive research, Babcock and Laschever found that 20% of women avoid asking for a raise even when they know it's appropriate. But those who do ask stand to gain as much as $1 million during their working lives compared to women who don't.

It stands to reason, then, that it's worth taking a few more steps to make sure your raise really boosts your bottom line and not your credit card balance.

This is especially true for Stephanie and Lyndsey, who are trying to dig themselves out of debt.

Stephanie has about $28,000 in school and car loans, plus some credit card debt. Lyndsey has about $11,000 in pure plastic.

How to prepare for a raise

Most people have a couple of weeks' notice before a raise takes effect, which is plenty of time to mourn the death of your spending fantasies and think about your financial aims. (There, there.)

Lyndsey got a 5% raise, boosting her salary by $2,000 to about $45,000, while Stephanie's husband got a whopping 22% increase, adding another $7,000 or so to their yearly household income.

Step 1: Prioritize: When it comes to a raise or any other windfall, big or small, mental preparation is as important as good money management.

Rather than think of the money as "extra," decide in advance which goals to target -- e.g. paying off debt, bolstering your retirement fund, adding to your savings cushion. Not -- repeat, not -- redecorating the dining room.

Step 2: Avoid lifestyle upgrades: A small splurge or two is a fine way to celebrate a raise (more on that in a moment). The mistake you don't want to make is using the raise to bump up your cost of living -- with a higher car payment, eating out more, etc. -- which would eat up the windfall and do little for your bottom line.

Managing the dollars and cents

Once you get the raise, there are a few options for maximizing the financial angle.

Option 1: Rebalance your budget: You can deploy a raise in such a way that it's evenly distributed throughout your budget from day one -- rebalancing your asset base, so to say.

In that case, I might take the additional $1,000 gross I'm earning per month and divide it according to the 60% Solution budget method (of course).

Monthly pay raise: $1,000

• Retirement savings: $100

• Long-term savings: $100

• Irregular expenses: $100

• Fun money: $100

• Taxes and committed expenses: $600

You have to be disciplined about allocating your money, so I strongly advise relying on Mother Technology to help you via automatic transfers and financial-tracking software, like Money or Quicken. I would not have a dime in savings or retirement were it not for this miracle.

The nice thing about this method is that you get a little bit of everything: some fun money to splurge with, more in savings and some money for keeping up with inflation and, perhaps, enhancing your lifestyle a bit.

Continued: The two-stage approach

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