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I believe that the very first thing to do when you get a raise (yes, even before a celebratory dinner) is to head to your human resources office and pick up the form you’ll need to adjust your 401(k) or other retirement account. If your company doesn’t offer a 401(k) or other type of retirement plan, move on to the next step:

Sit down and figure up what percentage a raise you’ve received. To do this, take the dollar amount of your raise and divide it by your current salary. For example, if the dollar amount of your raise is $3200 per year, and your current salary is $32,000, $3200 divided by $32,000 equals .10 or 10 percent.

Next, fill out the form and increase your 401(k)/company sponsored retirement plan contribution by at least an amount that falls within the percentage you calculated. If you aren’t currently contributing, seriously consider contributing a large portion (or even the entire amount) of your raise. Use each raise as an opportunity to increase your contribution until you reach the maximum allowed. If your company doesn’t offer a retirement plan, either start an IRA of your own or begin increasing your contribution to your existing IRA. Monthly or bi-weekly contributions are excellent, because they allow you to take advantage of dollar cost averaging.

What if you’re all set for retirement? Move on to debt or other investments/savings. The very last thing you should do is increase your spending. If you do this at all, be sure that you’re not increasing your spending to a level that is higher than your new after-tax income. Do have that celebratory dinner though (or some other small treat.) Raises are an wonderful opportunity to meet your long-term goals painlessly. After all, you won’t miss the money you weren’t used to getting in the first place.

Edited to add:
The main point is that while everyone’s situation will vary, I believe that it’s better to do just about anything with a raise except spend it. (Especially because people tend to over-estimate the difference the raise will make, and end up overspending. Or maybe that was just the previous-me…)

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