It’s always fantastic to get a raise. It’s physical confirmation that you’re good at what you do, and your efforts have been acknowledged.
But, what should you do with the additional money? While most of us can’t help but think about all the new items we want to buy, it’s critical to examine your personal finances before embarking on a shopping binge.
That way, you’ll know exactly how much your salary rise is worth, what your financial goals are, and how to use your extra money wisely.
How to Handle Salary Increases
When you first receive a raise, it’s tempting to buy a large, celebratory purchase. But first, there are a few actions you should take to guarantee you’re making decisions that will strengthen your financial security and better your future.
1. Give it time.
Initially, the monetary amount of your increase may appear to be a large windfall, but keep in mind that a major chunk will be used to pay taxes, health insurance, retirement, and social security, as applicable.
Before you get ahead of yourself, wait a few paychecks to see how much additional take-home money your increase provides on a bimonthly or monthly basis. What appears to be a terrific deal on paper may end up costing you a lot more money.
You may also compute your monthly rise yourself, but it will be inaccurate unless you know the amounts of any applicable deductions.
Waiting it out will allow you to see real figures and how big of a difference it is making in each paycheck. This will help you to calculate any excess money and spend it sensibly rather than overspending or mistakenly raising your monthly costs.
2. Review Your Budget.
Once you know how much your new pay raise will put in your bank account, you may reassess your budget. Now is an excellent opportunity to analyze your costs to see where you can save money and how your increase will benefit you the best.
For example, instead of taking a costly vacation, you may use some of your wage rise to pay off credit card or student loan debt. Alternatively, you might utilize the additional income to supplement your rainy day reserve.
It’s easy to succumb to lifestyle creep following a wage raise by indulging in luxury and failing to monitor your spending habits. Budgeting helps you stay in control and supports your financial objectives.
Instead of spending more money on big-ticket lifestyle changes with each rise, think about how rising costs may effect your financial health. How might buying a larger house or a new automobile effect your retirement goals and debt levels?
Use your budget to keep track of your living expenses so you don’t overspend after receiving a rise.
3. Retool Your Retirement.
If you don’t need the money right now, you may utilize your pay raise to improve your retirement savings.
For example, you can increase the amount you contribute to your Roth IRA or 401k retirement account. Even a tiny monthly increase can have a major long-term impact, especially if your company matches contributions.
Not only can saving more in retirement provide you with long-term financial stability, but it will also ensure that your rise is used wisely.
4. Pay off debts.
If you have debts, changing your salary range is a great method to put more money toward paying them off. For example, you can utilize your salary rise to cover:
Credit Card Debt
Student loans
Automobile loans
Medical Debt
Personal loans
The more debt you pay off, the more money you save in interest payments over time, allowing you to keep a large portion of your money. If feasible, save the most money by paying off all debts rather than just making payments.
You may also increase your credit score by paying off debts, which can benefit your financial status even more, especially if you want to make large purchases in the future, such as a home.
5. Plan for taxes.
When you earn a raise, you should anticipate to pay more in taxes this year than the previous year. Depending on your tax rate, your increase may be so little that you no longer qualify for certain deductions or tax credits.
Understanding how your new pay will effect your taxes helps you determine whether you should expect a refund or a bill.
If you are not comfortable calculating or estimating your own taxes, contact an accountant or financial planner. They’ll be able to offer you a fair indication of what to expect at tax time based on your wage raise.
If it appears that you will owe more money at the end of the year than you planned, speak with your employer about raising your withholdings to meet the amount owed.
6. Increase charitable donations.
Another method to spend your raise is to make more gifts to charity and nonprofit organizations. Not only will it distribute the wealth, but charitable gifts are often tax deductible, thereby lowering your annual tax bill.
This is especially handy if your increase has moved you into a higher tax rate.
You can give a set monetary amount or a percentage of your salary, depending on your financial situation. You can also give things such as a used automobile, but you must have a tax receipt to claim them on your taxes.
7. Add to your emergency fund.
Your emergency fund, also known as a rainy day fund, is intended to help you when your financial status changes or you have an unexpected purchase. For example, it’s beneficial to keep a cash reserve in case you lose your job or your refrigerator stops operating.
If you don’t have any pressing expenditures to make with your new increase, now is a good time to build up your emergency fund. Having assets you can rely on in the future will provide you peace of mind and save you from worrying about how to cover a cost during a difficult scenario.
8. Keep track of your spending.
It’s perfectly okay to celebrate when you earn a raise, but you should keep your spending under control. A pleasant meal or night out is one thing; prolonged extravagance and unnecessary purchases are another.
If you decide to treat yourself — and you should — be sure that whatever you choose is within your budget and is a one-time occurrence. Otherwise, you’ll succumb to lifestyle creep and those indulgences will become the standard.
Choose one or two methods to reward yourself and stop there. Just because you’re generating more money doesn’t mean you should spend it all on frivolous purchases and activities.
9. Consider Inflation.
If you haven’t received a raise in a while, you may fairly anticipate that some of your pay rise will be used to offset the costs of inflation. That implies that instead of putting more money in your pocket, your increase will be used to cover growing costs for necessities like rent and food.
Before spending your raise, check the inflation rate to discover how much costs have risen since the last time you earned a salary boost. This can help you realize how much additional purchasing power your increase provides and how it will affect your budget and financial planning.
10. Save for a large purchase.
If you want to make a large buy in the near future, use your increase to bring you closer to your objective. For example, put it towards:
A down payment on a house
A wedding A new car
A fantasy trip.
Your child’s tuition
A house remodeling
Before you spend your increase on something else, consider whether you have any large upcoming bills. Setting aside extra income to meet potential bills can allow you to achieve your objectives faster and help you deal with any unexpected expenses that arise.
11. Invest in yourself.
Putting your increase to good use by investing in yourself. For example, you can:
Return to school.
Learn a new skill.
Hire a Personal Trainer.
Get a gym membership.
Start a side business.
See a therapist or counselor.
You can even get laser eye surgery or have an old tattoo erased. Whatever enhances your own quality of life and makes your future happier and healthier.
12. Do something fun.
At the end of the day, your hard work and commitment paid off with a raise. You deserve to reward yourself with something exceptional. Whether it’s a new pair of shoes or a luxury supper, set aside a tiny percentage of your increase to celebrate your accomplishments.
Depending on the size of your increase and how much money you have left over after meeting any financial obligations, you could:
Go on vacation.
Schedule a spa day.
Buy yourself something pleasant.
Treat your loved one
Fund a hobby.
Consider this a chance to honor your professional accomplishments and thank yourself for a job well done.
In Conclusion
Moving up the salary scale is always worth celebrating, whether it entails additional duties or not. But, before you spend all of your new money, think about how to get the most of it.
That might include examining your budget, paying off debts, or saving for a large purchase – whatever is appropriate for your financial objectives and situation.
Regardless of how you spend your increase, remember to save some money to pamper yourself. After all of your hard work and dedication to your job, you deserve to enjoy your achievements.
