Make your next raise really pay off

Option 2: The two-stage approach: Another option is to take the entire amount of your raise and put it toward a single goal, like paying off debt. Once that goal is met, you weave the money into your overall budget, as in Option 1.

This would be a good strategy for Stephanie and her husband. At the couple's payment rate of about $700 a month, they can expect to be debt-free in a little less than four years.

But if they put her husband's entire raise toward paying down debt, about $450 after taxes, they would be debt-free in just over two years. (Alternatively, they could dramatically increase their retirement savings, which have been minimal until now, and keep whittling down their debt more slowly.)

Once the debt was paid off, they could use the 60% Solution budget method to rebalance their budget, dividing the raise into each category.

Here's how much additional money they'd be spending and saving:

Monthly pay raise: $583

• Retirement savings: $58

• Long-term savings: $58

• Irregular expenses: $58

• Fun money: $58

• Taxes and committed expenses: $351

By then, Stephanie and her husband might have earned additional pay increases, which they could fold into this plan -- or use for one of the other options.

Option 3: Pretend you never got a raise: Like Option 1, you simply take the entire raise and put it toward one of your financial goals, but when that one's complete, you simply shift the money toward another goal.

This might work well for Lyndsey, who can now put an additional $130 a month after taxes toward debt, becoming debt-free in 19 months instead of two years.

Once she's finished paying off her debt, Lyndsey could put the raise toward her retirement, to which she's only contributing 1% of her income. In this case, she would be able to sock away the gross amount of her raise each month, about $180, because her contributions would be tax-deferred.

This option requires a pretty Zen mindset, because you have to be content with your lifestyle as is.

A word about fun money

Obviously a raise is a cause for celebration, so it's fine to treat yourself -- within reason. But if you splurge, do it with the first month's increased income and then settle in to one of the options outlined above.

Whichever way you do it, I strongly advise spending a little something on pure pleasure.

Too much budgeting makes Jill a dull and cranky girl who might rebel and order irresponsibly from the L.L. Bean catalog. That's only a theory, of course.

Updated March 14, 2008

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