The concept of living one pay raise behind is to "bank" the pay increase for a year. In other words, you don't increase your standard of living . When you get another raise the following year, you allow yourself the increased pay raise you got the year prior, but bank the current year's raise, so on and so forth.
Last year I got a nice 5% raise and I immediately increased my 401k contribution from 13% to 15% of my pre-tax income. My pay-raise net me an extra $34 per paycheck, which I planned to put into my savings. This meant that after one year, I should have an additional $884 extra saved. How did I do?
RESULT: I saved an additional $590, or 66.7% success rate.
For starters, I didn't adopt this system until May last year, which meant a reduced savings of $68.
Secondly, I cheated. I gave my self a "raise" but only by $4/paycheck, which reduced my savings by about $104.
Thirdly, I stopped saving my raise in February when my rent increased by $20/month and the costs of my benefits increased (e.g., monthly medical and dental insurance premiums). This reduced my savings by about $120.
Despite only being partially successful, I'm actually pleased with the result and highly recommend it.
My company recently announced a 3% COLA raise and I've increased my 401k contributions from 15% to 16%. However, I've decided that I won't be putting away any of the remaining pay increase into my emergency fund anymore. I'll instead "earmark" the pay raise into my "cost of living inflation" fund.
The reasons for this is because I anticipate serious increases in my cost of living this year:
- My rent will likely increase in August;
- California sales tax will increase by at least 1% in April;
- My car registration will nearly double in December;
- My state income tax will increase;
- And finally, I expect gas prices will increase from the current $2 level to $3/gallon.
It makes sense for me to stash this money away for anticipated increases in my cost of living since, after all, the raise was a cost of living adjustment and not a merit raise, right?
Anyhoo, have a great Happy St. Paddy's Day, everyone! I'm gonna go find me some green beer this evening!