Getting a raise always feels great. It’s tangible proof that you’re good at what you do and your hard work has been recognized.
But what should you do with the extra income? While most of us can’t help but daydream about all the new things we plan to buy, it’s important to take a close look at your personal finances before going on a spending spree.
That way, you’ll have a clear idea of how much your pay raise actually amounts to, what your financial priorities are, and how to make smarter investments and purchases with your additional income.
How to Handle a Salary Increase
When you first get a raise, it’s tempting to make a big, celebratory purchase. But before you do, there are some steps you should take to ensure you’re making decisions that reinforce your financial stability and improve your financial future.
1. Give It Some Time
Initially, the dollar amount of your raise might sound like a significant windfall, but remember that a considerable portion will go toward taxes, health insurance, retirement, and social security, if applicable.
Before you get ahead of yourself, wait for a couple of paychecks to see how much extra take-home cash your raise amounts to on a biweekly or monthly basis. What sounds good on paper may be significantly less in your pocket after all is said and done.
You can also calculate the biweekly amount of your raise yourself, but it won’t be accurate unless you know the amounts of any relevant deductions.
Waiting it out will give you a chance to see real numbers and how much of a difference it’s actually making on each paycheck. This will allow you to determine what any extra money amounts to so that you can spend it wisely instead of overspending or accidentally increasing your monthly expenses.
2. Reassess Your Budget
Once you know how much your new salary increase will put in your bank account, use it as an opportunity to reevaluate your budget. Now’s a great time to review your expenses to determine where any adjustments can be made and how your raise can do the most good.
For example, you may want to allocate a portion of your salary increase to paying off credit card or student loan debt instead of booking an expensive vacation. Or, you may use the extra cash to bolster your rainy day fund.
It’s easy to fall victim to lifestyle creep after a pay increase by indulging in luxuries and not keeping a close eye on your spending habits. Budgeting helps to keep you in check and supports your financial goals.
Instead of increasing your spending on big-ticket upgrades to your lifestyle each time you get a raise, consider how higher bills will affect your financial health. How would buying a bigger home or a new car affect your retirement plans and how much debt you have?
Use your budget to keep an eye on your cost of living so you don’t accidentally overspend after a new raise.
3. Retool Your Retirement
Especially if you aren’t hard up for cash right now, you can use your salary increase to boost your retirement savings.
For example, you can increase the amount you put into your Roth IRA or 401k retirement accounts. Even a small monthly increase can make a significant impact over time, especially if your employer offers contribution matching.
Not only will investing more in your retirement give you long-term financial security, but it will also make sure your raise is put to good use.
4. Pay Off Debts
If you have debts, entering a new salary range is an ideal way to put more money toward paying them off. For example, you can use your pay increase to cover:
- Credit card debt
- Student loans
- Car loans
- Medical debt
- Personal loans
The more debt you pay off, the more you save in interest charges over time, keeping a significant amount of money in your pocket. If possible, save the most by paying off debts entirely instead of just making payments.
You can even improve your credit score by paying off debts, helping your financial situation even more, especially if you plan to make any big purchases, such as a home, in the future.
5. Plan for Taxes
When you get a raise, you can expect to pay more in taxes this year than you did last year. Depending on which tax bracket you’re in, you may even find that your raise is barely noticeable if it means you no longer qualify for certain deductions or tax credits.
Understanding how your new salary will affect your taxes gives you an idea of whether you should expect a refund or a bill.
If you aren’t comfortable calculating or assessing your taxes yourself, get in touch with an accountant or financial planner. They’ll be able to give you a good idea of what to expect come tax time based on your pay increase.
If it looks like you’ll owe more money at the end of the year than you anticipated, talk to your employer about increasing your withholdings so the amount you owe is covered.
6. Increase Charitable Donations
Another way to spend your raise is to increase your donations to charities and nonprofit organizations. Not only will it spread the wealth, but charitable donations typically count as tax deductions, potentially reducing the amount you owe each year.
This is especially useful if your raise bumped you into a higher tax bracket.
You can either choose to donate a specific dollar amount or a percentage of your income, whichever works best for your budget. You can also donate items like a used car, however, you’ll need a tax receipt in order to claim it on your taxes.
7. Add to Your Emergency Fund
Your emergency or rainy day fund is meant to lend a hand when your financial situation changes or you need to make an unexpected purchase. For example, it’s helpful to have a buffer of cash set aside if you lose a job or your fridge decides to stop working.
If you don’t have any pressing purchases to make with your new raise, it’s an ideal time to fill up your emergency fund. Having funds you can rely on in the future will give you peace of mind and save you from having to panic about how to cover an expense during a stressful situation.
8. Monitor Your Spending
It’s completely acceptable to celebrate when you get a raise, but it’s important to keep your spending in check. A nice dinner or night out is one thing, but extended overspending and unaffordable purchases are another.
If you do decide to treat yourself — and you should — make sure whatever you reward yourself with is within your spending limits and that it’s a one-time occurrence. Otherwise, you’ll soon fall victim to lifestyle creep and those luxuries will become the norm.
Choose one or two ways to treat yourself and stop there. Just because you’re making more money doesn’t mean you need to spend your entire raise on frivolous items and outings.
9. Consider Inflation
If you haven’t had a raise in a while, you can safely assume that part of your salary increase will go toward covering the costs of inflation. That means that instead of adding up to extra cash in your pocket, your raise will go toward rising prices for everyday expenses like housing and groceries.
Before spending your raise, take a look at the inflation rate to see how much prices have increased since the last time you received a pay bump. This will give you a better understanding of how much added buying power your raise amounts to and what it will mean for your budget and financial planning.
10. Save for a Big Purchase
If you’re planning to make a big purchase in the near future, use your raise to help get you closer to your goal. For example, put it toward:
- A down payment on a house
- A wedding
- A new vehicle
- A dream vacation
- Your child’s tuition
- A home renovation
Consider whether you have any major expenses coming up before spending your raise elsewhere. Setting aside your extra cash to cover upcoming costs will allow you to reach your goals faster and help you to navigate any unexpected costs you encounter.
11. Invest in Yourself
Investing in yourself is an excellent way to use your raise. For example, you could:
You can even do something like get laser eye surgery or have an old tattoo removed. Whatever helps to improve your personal quality of life and makes your future happier and healthier.
12. Do Something Fun
At the end of the day, you earned a raise through your hard work and dedication. You deserve to acknowledge your accomplishment by treating yourself to something special. Whether it’s a new pair of shoes or a fancy dinner, make sure at least a small portion of your raise goes toward celebrating your success.
Depending on how big your raise is and what you have left after you take care of any financial priorities, you could:
- Go on a vacation
- Plan a spa day
- Buy yourself something nice
- Treat a loved one
- Fund a hobby
Take this as an opportunity to recognize your professional achievements and reward yourself for a job well done.
Moving up on the pay scale is always worth celebrating, whether it comes with new responsibilities or not. But before you spend all your new money, take some time to consider how to get the most out of it.
That could mean reviewing your budget, paying off debts, or saving up for a big purchase — whatever suits your financial goals and situation.
Regardless of how you choose to spend your raise, remember to set some money aside to treat yourself. After all the time and effort you put into your career, you deserve to celebrate your accomplishments.