You Got a Raise! Now What?
So, you got a raise! Now, it's time to start putting that money to work for you. While your first thought might be shopping spree, consider instead these other options that will build your wealth and secure your financial freedom.
Have Realistic Expectations
Your raise may sound like a lot, but once you receive your paycheck, you may be surprised to find how little your take-home pay actually changed. Don't make plans based on a quick mental calculation. Get the actual amount from your paycheck to know how the raise will actually impact you.
Make a Plan
Of course it's okay to reward yourself a bit for working hard and getting a raise. But don't just pocket the extra money and add it to your fun budget. Check your savings, credit card debt, and investments to see which areas can use a boost, and put your raise there. You can decide to put three months' worth to pay down your debt, and then take a one month break to splurge. Consider your financial goals and how every dollar makes a difference toward reaching them.
Increase Your Emergency Savings
In an ideal world, you should have a three to six month cushion in your emergency fund. If you already have a sizable emergency fund, then you don't need to worry about saving more with your increased income. Otherwise, saving more now will mean less stress later when an unexpected event hits your wallet hard.
Pay Down Debt
Paying off debt should be a priority in your plan to gain financial freedom. It can also help improve your credit score, save on interest, and reduce stress. Consider putting your raise toward debt payments. Even a small amount that you can add to your monthly payments will significantly lower the interest paid and help you pay it off faster.
Increase Your Retirement Savings
Can you put some of that raise into your retirement accounts? Your retirement contribution might also automatically increase as it is usually based on a percentage of your gross pay. Have you at least set your 401K contributions to get the full amount of matching from your employer? If you have an another retirement account, like a Roth IRA, get your annual contribution out of the way.
Refinance Your Loans
With a higher income, you may be eligible for better rates on a personal loan, mortgage, and car loan. You can apply for better loans now or wait for your credit score to increase after you've made some positive changes (such as paying down debt and lowering your debt-to-credit ratio).
It's never too early to pad your wealth with smart investing. These days the startup capital required is minimal. You can start investing with a few hundred dollars. Online brokerages often have a low minimum with low fees. Financial robo advisers can take a lot of the work out of figuring out what to buy. (See also: Easy Ways to Invest Your First $1,000)
It won't hurt to reward yourself a bit for a job well done. Have a celebratory dinner or buy an affordable gadget that you've been wanting. You can also start saving toward a vacation or other large purchase.
Prove Your Employer Right
Getting a raise means you've done a good job and deserve to be rewarded for it. Prove your employer right by continuing your positive behaviors, always putting your best foot forward, and looking forward to the next raise. You may also want to write a thank you card, especially if your manager or boss worked hard to get you the raise.
Disclaimer: The links and mentions on this site may be affiliate links. But they do not affect the actual opinions and recommendations of the authors.
Wise Bread is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.