Got a salary raise? Here is how to budget for it.

Got a salary raise recently? Congratulations. Now, are you saving more since you got that raise? Not likely, right? Well, here are some suggestions which may help you in making sure that you do just that - with the least amount of pain.

I'm assuming that you already have a budget and is following it. In case you are not, suggest that you read Micheal's excellent website It's Your Money. That should set you on the right path about setting your personal finances in order.

Anyway, as I said above, assuming that you do follow a budget, how do you factor in any increases in income - especially increases in salary? Some people suggest that we calculate the increase in our take home income and save that much more so that we do not end up spending our increases. Some others suggest to ensure that we always save X% of our salary so the increase in income is automatically taken care off.

Both are good suggestions but I feel that they do not address all the issues - inflation for example. How can we maintain our lifestyle on the same amount of money year after year if we opt to save all our future increases in income? Desirable, but not practical I think.

Through trial and error, i have come up with another method to account for increases in income which has worked for me so far. Every time i get a raise (usually once a year), I calculate the average consumer price inflation percentage of last 5 years and increase amounts in my expense budget categories by that much percentage. In case I do not spend that much for a certain expense category, I just sweep that amount into my savings every quarter. This way, I get to save more when i get an increase in salary as well as to account for inflation and suitably adjust my expenses.

How do you handle an increase in income? I would love to know.

Re-located to US of A

I have relocated to US and will be here for some time to come. Was busy in the relocation process and did not have much time left to blog. Hope to remedy that and start posting soon. Plan to post about the scene out here compared to my experiences in India.