You’ve seen a recent improvement in your financial situation. Maybe you finally got that raise you’ve been waiting for or your kids finally moved out of the house. Now that you have the extra income, what should you do with it?

For many it’s easy to fall into lifestyle creep: raising your standard of living as your disposable income increases. But increasing your discretionary spending to reflect your new income can be financially dangerous.

For example, imagine getting a $6,000 raise. After taxes, you’ll have $4,500 left (at a 25 percent tax rate). This equals an extra $375 in your pocket each month. A raise like this might spark many to consider a new apartment, a new car or extra nights out on the town. It wouldn’t be long before most people would spend not only this money, but possibly more.

Why does this matter? In 2016, U.S. Bank stated that only 41 percent of people have a budget, making it easy to overspend in response to a new raise. CNN has reported only 30 percent of people have more than $1,000 in the bank and that almost half of Americans would have to borrow money to cover an emergency costing $400 or more. Most people would benefit by using it to secure their financial future.

How to Avoid Lifestyle Creep

As we know, most people don’t budget, they don’t have enough in the bank, and they don’t save enough for retirement. Extra income can be used to remedy these issues but only if you avoid lifestyle creep. Here’s how:

1. Add to Your Retirement

It cannot be overstated — you need to save for retirement. Your retirement fund will someday replace your salary, allowing you to maintain your lifestyle once you’ve retired. Unfortunately, if you allow lifestyle creep, you could spend all your discretionary income without saving enough, resulting in an inability to maintain your lifestyle once you’ve stopped working.

As a benchmark, your retirement contribution should increase when income increases. In the situation above, a raise of $375 per month would put an extra $56 a month toward retirement — more if you’re currently under-contributing. Many retirement planning tools – like a 401(k) take retirement savings directly from your pre-tax income, so when your salary increases so do your contributions. You should aim to save 15 percent of your overall income for retirement.

See also: Retirement Savings Calculator

2. Create or Check Your Budget

If you don’t already have a budget, you should. A budget helps you track expenses and helps you plan for larger purchases. If you already have a budget, you should see if it currently supports your financial goals. Here are some questions to ask yourself during this evaluation:

  • Do I have an emergency fund that could cover expenses for three to six months?
  • Do I have any debts that need to be paid off?
  • Am I putting enough away for my child’s college fund?
  • Do I have any pressing financial needs, like for the replacement of old tires?

Asking these types of questions will help ensure your new income works for your benefit.

3. Maintain Current Spending

If you don’t have an urgent spending need, maintain your current spending for a month or two. This cooling-off period will help you avoid making rash purchases following your increase in income. In the meantime, the extra cash will accumulate in your bank account. When the time comes to modify your budget permanently, or make a purchase, you’ll have the money available.

4. Account for Additional Costs

Once you’ve evaluated your budget and made it past the cooling-off period, you can start to spend your extra income. You should keep in mind, however, that many purchases lead to additional expenses: 

  • Leasing a nicer, bigger apartment will likely mean a higher heating bill.
  • Buying a new bike might require a helmet, safety lights or car mount.
  • An ATV purchase will likely mean buying recreational vehicle insurance.

The point is, many purchases come with a secondary cost that’s not accounted for in the initial total. Make sure to account for all the costs associated with a new purchase in your budget. Otherwise, you could quickly overspend.

How can you make the most of your new financial windfall? Your Farm Bureau agent is here to help. We have the tools to help you choose smart decisions with additional income so that you can enjoy your additional funds today and into the future. Contact your Farm Bureau agent for budgeting and investment tools.