Dec 14, 2025
While getting a raise may seem like it should put you in a better financial position, that's not necessarily true for everyone.
Picture a 31-year-old man named Max, for example. Let’s say he was making $4,500 per month but recently got a $500 raise after working for his company for three years, bringing his income to $5,000 per month.
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While that's a pretty big pay increase, it was also Max's first raise in three years — and in that time he moved, and has seen his rent go up $250 per month. His utilities are also up $100, and groceries are $100 per month higher than they were thanks to inflation.
Max, like many people, feels like nothing has changed despite his raise. He also still finds himself putting off big expenses like car repairs, having to calculate gas to the dollar and check his bank account before making routine purchases.
What can Max do in this situation to try to make his $500 per month raise meaningful, and make sure he's making the most of this extra money? Here are some tips on how to manage a raise.
Raises and the rate of inflation
First things first: while a salary increase makes your paycheck bigger, it doesn't necessarily mean that you have more buying power, that you can save more, or increase your living standard. You will only be able to do these things if the salary increase exceeds the rate of inflation.
In the post-pandemic era, there were some years when inflation was very high. For example, the U.S. Inflation calculator reported a 7% inflation rate in 2021 and a further 6.5% annually in 2022 (1). Even in 2025, the average so far this year is 3%, which is above the Federal Reserve's target 2.00% inflation rate (2).
In other words, if you get a 2% raise and inflation is up 2.9%, your cost of living is going up faster than your pay.
Unless you make lifestyle changes to adjust for the fact that things are getting more expensive — like having more meatless meals as grocery prices increase or turning your thermostat down as utility prices increase — your raise won't provide extra money, it will just keep you from losing ground.
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How can you make the most of a pay increase?
One of the best things that you can do when you get a raise is to redirect some of the funds to long-term goals before you get used to spending the money.
Let's say you get a 2% raise. You could increase your automatic 401(k) contribution by 1% immediately. If you do this, then you can just keep living on the money you're already used to living on.
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If inflation is outpacing your raise, this may mean you're forced into tightening your belt a little. Whatever tweaks you've already done to make things more affordable, like cutting coupons or dining out less, you can just continue doing.
And, since you're redirecting the money right away towards a long-term goal, the money you're investing can grow and compound, turning into a substantial amount over time.
You can also put some of the money towards things like:
- Saving for emergencies
- Saving for big purchases like a vacation
- Paying down debt
A lot depends on where you're starting financially, as it usually makes sense to:
- Ensure you are earning your full employer match in a 401(k)
- Devote extra money toward high interest debt
- Bulk up your emergency fund
- Increase retirement savings
- Start saving for big-ticket ‘want’ items, like a vacation or new car
The key, though, is to redirect the raise to these goals before you get a chance to do anything else, because otherwise you're likely to give into lifestyle creep and get used to the additional funds, using them for routine costs instead of to make your future stronger.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
U.S. Inflation Calculator (1); Federal Reserve (2).
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
