Can a pay raise be a bad thing? Absolutely� and here�s how to evaluate your raise.

Every year, many employees receive a pay raise or a �merit� increase. Some are even so unlucky as to receive no raise at all. Receiving a raise at first glance appears to be a wonderful thing. You�re bringing home a bigger paycheck, allowing you to buy more of what you want, or to save more for retirement. What could possibly be bad about that?

At closer inspection, a raise can actually be a bad thing. Imagine that your income is $40,000 per year and your living expenses are $30,000 per year, netting you $10,000 per year. Next year, you receive a 2% raise, increasing your income to $40,800. You can�t wait to receive that extra $800 each year. That�s a brand new TV right there!

Before you get too excited, unfortunately there is a little problem with that measly 2% raise. Historical inflation tends to settle right around 3.32%. Inflation is the gradual increase in the price level of goods and services, meaning that over time, each dollar buys fewer goods and services.

This means that the 2% raise is actually a 1.32% pay decrease! Although your income is now higher at $40,800, your expenses have increased to $30,996. This means that your expenses increased by $996 while your income grew by only $800, making you $196 worse off each year!

The next time you receive a raise, check how it compares to the inflation rate. You�ll probably find that the raise is actually right in line with inflation, meaning that you�re actually no better or worse off than in the previous year. If you receive no raise at all, you�re actually making 3.32% less than you did last year. Saying that your pay hasn�t changed is actually deceptive way of decreasing pay.

On the other hand, for a business, an owner can slip through a pay decrease by raising salaries by less than inflation or by claiming there will be no raise for the year. It�s a sly way of cutting pay without raising eyebrows, and sadly, most employees likely wouldn�t notice the difference.

By checking the inflation rate and comparing it to your raise, you�ll be in a better position to decide whether it�s something to celebrate or not.