8 Ways to Make the Most Out of a Pay Raise
Congratulations! You finally got that well-deserved raise! After all, you spent the last several years working for the company and dedicated your skills, knowledge, and expertise to your job. Your boss finally noticed and acknowledged all the hard work that you do, and starting on your next payday, your salary is going to be higher than usual.
Getting a raise is one of the best things that can happen to your career. Although projections say that the average pay raise in the US for 2018 hovers around 3%, while well-performing employees get around 4.5% t0 5% increase, it’s still a raise.
If you’re a seasoned employee, the euphoria of getting a raise is probably not very new to you. But for the youngsters out there who are just getting their first dibs on a real job, the raise represents their worth to the company. It’s something one can be proud of. It’s an event worth a celebration.
You might think of all the nice things you can do with that extra cash. You might perhaps desire to take a trip to an exotic destination or an upgrade to your dream car. Maybe you want to replace that old couch and have a new entertainment system in your living room.
But you don’t want to get ahead of yourself and already conjure all the ways you can splurge all that extra money – well, at least not yet.
You Got a Raise, Now What?
After your boss informs you of a pay raise, don’t do anything yet. You want to wait for a while and try to figure things out.
First of all, you don’t how long the paperwork will take for the raise to finally reflect on your paychecks. Even if you already know that you’ll get X% of raise, you want to wait until everything is settled in paper.
Second, you need to calculate how much raise you’ll actually get after taxes. An increase in your salary will also mean an increase in your tax rate. Not only that, other contributions like retirement and health premiums are bound to increase as well. You might want to wait until at least you get two or three more paychecks to establish what your take-home pay would be.
Warning about Lifestyle Creep
Now that your paycheck has increased, you might already consider upgrading your lifestyle. After all, you now have more money to spend.
But some people take it too far to the point that earning all those extra dollars backfires to them. They feel like if they can surpass the Joneses, they can tackle the next big earners in the neighborhood. In which case, the raise creates a false sense of financial security.
Don’t stop yourself from availing some of the things you can’t afford with your previous paycheck, but also make it a point to secure your financial future before you do so. Inflating your lifestyle to a certain extent is bound to happen when you get a fatter paycheck, but don’t fall prey to it. At the end of the day, it should be you who has control over your money, not the other way around.
Tips to Get the Most Out of Your Raise
1. Reassess and Adjust Your Budget
Now that you are earning more, you might consider spending for a few more things, like new appliances or kids’ activities. In which case, your old budget may not work well for you now.
After determining how much raise you actually got, you need to sit down and tackle your budget. Start by listing all your expenses, recurring and non-recurring, and compute them on a monthly basis. Review your bank statements to get a real sense of how you’ve been spending for the last several months. Write the total of your monthly expenses.
Now, determine your new monthly take-home pay. The goal here is to keep expenses within your paycheck; otherwise, you would fall into lifestyle creep, and most likely go into debt.
You also need to decide how to best use your salary increase. For instance, you might fund some areas of spending you previously cannot afford to, such as home improvement or car repairs. Or, you could contribute a certain portion towards your kid’s college fund, add more to retirement or aggressively settle most debts.
With a budget, you’re most likely to direct your new income to meaningful use. Without one, you may end up spending all those extra money towards your wants without putting a heavier value on your needs.
2. Invest Some of It
Saving some of the extra dollars in your now larger paycheck is a must, but if you want to truly build your wealth over time, you need to invest some of it as well. You don’t really need a large fortune to start investing. You can deposit small amounts of money to your investment or money market account, consistently and regularly, and then you can watch that money grow over time.
3. Pay Off Debts
If your previous income hinders you from paying most, if not all of your debts, then this pay raise is a good opportunity to do so. Did you know that the average American pays around $28,000 in interests in his lifetime? If you can eradicate debt quickly, you also free up more money to grow your savings and investments, instead of spending it to pay interests of your debts.
Now, take a long hard look at all your debts and figure out which ones you can start paying with your new income. Ideally, you should be paying high-interest debts first like credit card and loans because the interest alone eats up a lot of money.
Additionally, paying off your debts will improve your credit score. It doesn’t give you the kind of bliss similar to retail therapy, and the results won’t come as quickly, but it does help improve your financial health as you do so. Lastly, reducing your debts also results in a reduction of stress and worries, allowing you to live a more peaceful life.
4. Pay Off Credit Cards
Although credit card debt is a staple to most of us, it doesn’t mean we should just live with it when we have the opportunity to eliminate it. Using some of the money from your raise is to pay off your credit card debt is a wise financial move, particularly because most credit cards carry crippling two-digit interest rates.
5. Boost Your Retirement Savings
According to Bankrate, 65% of the Americans do not have money saved for retirement. Your children may help you out in your golden years, and social security might give you some supplemental income when you’re out of the workforce, but you can do better than that. You must try to secure and solidify your nest egg while your body and income can still afford to.
Increasing your retirement contribution by even just 1% or $50 each month could go a long way in increasing your future retirement income. Even better, take advantage of the matched contributions offered by your employer to rapidly build up your retirement savings.
To make things even more straightforward and streamlined for you, have these deductions automatically taken out from your checking or savings account and transferred to your retirement account. That way, you’ll always be saving for your golden years even without seeing money changing hands.
6. Build an Emergency Fund
Did you always have to borrow money from a friend or sister when you’re out of cash? Did you always have to turn to your credit card or taking cash advances from it to cover emergency expenses?
The truth is, we all face emergencies at one point or another. Whether it’s a pet that needs to be taken to the vet, your car needing repairs or worse, you losing your job, emergencies can fall to us at the least convenient times. The matter aggravates when you don’t have the immediate cash to pay for such emergencies.
You can use some of your salary increase to establish an emergency fund, if you don’t have one yet. Experts recommend keeping at least six months of emergency fund in an accessible savings account so you can tap it any time the unexpected hits. If your emergency fund has been on the lean side for some time now, now is a good opportunity to finally fatten it up.
7. Plan for Next Tax Season
Working with taxes is never fun, but now that you have an increased salary, you must pay more attention to it more than ever. Your new salary is bound to affect your tax credits and deductions, and this is one important thing to keep an eye on.
First, you want to make sure that your new payroll has been adjusted to match your withholdings. You can ask the HR department to sort out this matter for you or visit the IRS website to calculate the right amount that should be withheld from your paychecks.
Are you excited about your upcoming tax refund? Well, you have to know that your increased salary might bring you to an upper-income tax bracket. You have to determine whether you’re still eligible for some tax deductions and credit.
8. Enjoy It But Don’t Blow It
Your new higher income warrants you some spending opportunity you didn’t have previously, so it’s only right to treat yourself for the hard work. You’ve earned and deserved it. And for that, it’s only right to deserve a portion of your income for some guilt-free spending, whether it’s a new pair of shoes, tickets to a concert or perhaps, pocket money for your upcoming vacation. You need to enjoy life too, but that doesn’t mean ruining your entire financial picture. Spend some money to things that matter to you, but ensure you’ve had the financial house all organized and covered.
If you’re giddy and excited about your pay raise, we understand that. But if you spend all of your paycheck month after month, and you still have a lot of debt with little savings, you’re not maximizing the potentials that raise has brought you. It has even placed you in a state of lifestyle inflation, and it’s not doing you any good.
With that said, focus your efforts and financial resources to the most important matter first, like establishing an emergency fund, saving, paying down debt and investing. These things aren’t as exciting as getting a suite to an expensive hotel or flying business class on a luxurious vacation, but these things help you build wealth and secure your financial future. You are making that raising work for you by eliminating expenses, financial stress, and eventually, making more money.
So if your boss happens to inform you today or sometime soon that a pay raise is bound to happen, think of all the rational, practical things you can do with that extra money. It’s an opportunity to get your finances in order, so make the most of it.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.