Getting a raise is a rewarding recognition of the hard work you’re doing. It means you’re valued by your employer and moving ahead on your career path. When you get a raise, your first instinct might be thinking of all the things you can buy now with that larger paycheck.
Before spending your extra cash, put a plan in place to help you avoid impulse buys. Take some time to think about how you can improve your financial stability. Below we’ve listed things to consider when you get a raise.
Pay down debt
Whether it’s student loan, credit card or other loan debt, it’s smart to pay down as much as you can, as soon as you can. Putting that extra money towards paying down your debt is one of the best ways you can get ahead financially. It should even be a priority over saving. That’s because you’re typically paying higher interest on debt than the interest you’re earning on a savings or investment account. Once you have your debt in a more manageable place, start putting more of a focus on building up your savings.
If you need help creating a plan to pay down your debt or would like help building healthier financial habits, chat with a Virtual Financial Coach. You’ll get personalized financial advice 24/7 on any smart phone or computer through text-based conversation.
Create an emergency fund
If you’ve ever been hit by a financial emergency, like a broken water heater, an unexpected medical bill, or loss of a job, you know how important it is to have an emergency fund saved up. Create a goal for your emergency fund, ideally it should be able to cover your living expenses for 3-6 months. Set up a separate savings account just for your emergency fund. Setting up an automatic monthly transfer from your checking account is an easy way to start building up your savings.
Don’t forget about retirement savings
It’s important to always save a certain amount of your paycheck for retirement. If your company offers a 401(k), try to contribute the maximum amount allowed. If you’ve maxed out the contributions to your 401(k), consider opening your own Individual Retirement Account (IRA). An IRA allows you to save for retirement with tax-free growth or on a tax-deferred basis. *
Don’t get caught up in lifestyle boost
The temptation of a lifestyle boost can seem appealing when you get a raise. Eating at upscale restaurants, spending more on entertainment or extravagant vacations can seem like something you deserve to buy for yourself with a raise. However, when you boost your lifestyle to match the extra money you’re making, you won’t have much left for paying down debt, saving for retirement or building up an emergency fund. It’s smarter to save or invest most of your raise, and only use a minimal amount towards indulgences.
Don’t forget about the potential sacrifices
A raise can sometimes come with a trade-off. For example, you may be required to work longer hours or you may have additional responsibilities. If you’re not ready to take on extra hours or work, you may want to think twice before accepting the raise. Take some time to consider the pros and cons first to make sure it’s the right fit for you.
Most people don’t save enough and when it’s time to retire or an emergency happens, they aren’t prepared. A raise is a great opportunity to stabilize your financial security. Make sure you don’t let the opportunity go to waste.
*Consult with a qualified tax professional for specific tax advice.