Week 1 Day 4: The Raise Trick

When your income goes up, your lifestyle wants to follow. This is called lifestyle creep. The raise trick is simple: the moment you get a raise, increase your automatic savings or investment contribution by at least half of the raise amount. You still get a bump in spending money. But your future gets funded first.

Say you get a $200/month raise. Before you adjust anything in your daily life, bump your automated investment from $300 to $400. You still have an extra $100/month to enjoy -- that is real and you should enjoy it. But the $100 you redirected starts compounding immediately. Over 20 years at 7%, that extra $100/month becomes roughly $52,000. The key is doing it before you get used to the new income level. Once you adjust your lifestyle upward, it is psychologically painful to cut back. But if you redirect the money before you ever see it in your checking account, you never miss it.

Behavioral economists call this the 'Save More Tomorrow' principle, pioneered by Richard Thaler and Shlomo Benartzi. Their research showed that people who committed to saving a portion of future raises -- before the raise arrived -- saved dramatically more than those who tried to cut current spending. The reason: loss aversion. Cutting current spending feels like a loss. Redirecting a raise you have not yet received does not. Thaler won the Nobel Prize in Economics in 2017, partly for this insight. The practical version: set a rule for yourself. Every raise, 50% goes to savings. Automate it. Never negotiate with yourself.