A recent pay raise has my friend Sandy and her husband Dave at odds with each other.

She wants to split the extra money between savings and paying off debt. Dave feels that they’ll end up spending the money anyway, knowing they have it available.

Their debt consists of a mortgage and monthly credit card usage; the credit cards get paid every month in full. They are in their late thirties, have two children under the age of five, and are concerned about college expenses, especially since they have yet to begin saving for the kids’ education. Their retirement consists of Dave’s 401(k) and a joint Roth IRA. The 401(K) gets the maximum allowed contribution, but the Roth contribution is only $3,000 annually, well under the $5,500 allowed.

Sandy wants to avoid lifestyle creep, while Dave thinks it’s inevitable. Is there a right or wrong here, or is a compromise possible?

Seven smart steps when you get a pay raise

• If you cruise, you lose: Be decisive about where the pay raise fits in your financial picture; don’t just sit in cruise control mode, or dream about how to use the money. Set up a separate account just for the pay raise funds, and divert the money there via automatic deposit. If you don’t have an emergency fund, a pay raise is a great way to start one.
• Common debt, common goals: Consider your budget, debt and financial goals. Would using the raise to pay off credit cards or save for a family vacation be a better option than blowing it on that dirt bike or skis you want right now? For Dave and Sandy, there is a common goal: building up their IRA contribution to the maximum allowed, thus saving on taxes.
• Money helps, but does it change anything?: If your spending is already out of control, a pay raise won’t make it better. Additional funds will just feed the spending beast. This is an issue I dealt with, until I discovered the possibility of offsite banking; direct deposit of money to a savings account that is not a local brick-and-mortar bank. Some of the better-known offsite banks include HSBC and ING/Voya Financial. You’re less tempted to spend if you cannot easily access the funds.
• Plant your pay raise and grow it: Save the pay raise, and give yourself another one by matching the amount, thus doubling your savings. Or use it to reap bigger raises by taking professional courses, thus increasing your knowledge and raising your value on the job.
• Money equals time: It’s so tempting to go out and spend your pay raise now. But while you’re dreaming about what that pay raise can buy, remember that saving it can equal more time later, in the form of an earlier, more secure retirement. This is exactly why I save my pension payments. For Sandy and Dave, saving now can mean avoiding the crushing cost of college loans.
• Consider investing: You don’t have to buy a huge chunk of stock in order to begin; there are ways to buy just a few shares at a time. Or consider real estate investing with an eye towards property that will provide you with future income.
• Keep a happy balance: Nothing wrong with a small pay raise splurge; going overboard and saving every penny can make you look cheap. Frugal vs. cheap can be challenging to balance. Remember that you did work hard for this money.

How do you handle pay raises? What would you like to do differently?