When you get a raise at work, you not only feel great because your
job performance has not gone unnoticed, but you also get a better sense
of job security. Of course, this also means more money in your pocket,
which may lead to irresponsible spending instead of taking personal
financial responsibility and investing in your future. What you need to
focus on is creating good spending habits right away.
First and foremost, you need to prioritize. Ask yourself if those
major items you’ve been meaning to buy are really that important. Go
ahead and revel in your success conservatively, but plan what you need to do before what you want to do with the additional money.
Here are a few simple tips on what to do when you get a raise at work.
1. Sit on it for a bit.
Before you jump into making new purchases, take some time to get used
to the dynamics of your bigger paycheck. One thing you’ll notice is
that you’re getting taxed more. The more money you make, the more money
the IRS will take. For example, my friend’s sister got a $10,000 salary
increase last year, but her bi-weekly paycheck only increased $200. So
wait and see how much of that new raise you’ll actually get to take home
before making any decisions.
2. Pay off debt.
Do you have credit card debt or student loans? If you have any
outstanding, high-interest debt, accelerate your payments. Start with
the highest interest debt and pay it off first, or consider a balance
transfer promotion with 0% APR. However, this doesn’t mean delay saving
for retirement, so remember to consistently contribute to your 401(k)
and individual retirement account.
Without debt, you will be able to save more money. Not only will you improve your credit score,
which can save you thousands in interest payments when you buy a house
or car, but you’ll also reduce stress, improve your physical health and
feel a great sense of pride. All of this will motivate you to continue
spending responsibly.
3. Adjust your retirement plans.
After you’ve reviewed your debt and liabilities, it’s time to move on
to your retirement plan. If you have more disposable income, you can
start maxing out your retirement benefits, especially if your employer
offers a 401(k) matching plan. By contributing to your retirement, you
may not have extra money left over for the newest iPhone or a big screen
TV, but you will gain future financial security.
4. Review your insurance policies.
Do you have all the basics of estate planning? Do you own life insurance and disability insurance? If not, are you knowledgeable about all the different types of life insurance available
beyond just traditional term, whole or universal policies? Re-assessing
your insurance needs to determine whether your current policies
adequately cover your family is important anytime you experience a
sizeable increase in income.
5. Save for tax season.
If you’re really looking forward to that tax refund, remember that
the more you make, the more you’re taxed. Having a higher income means
you may be in a new tax bracket and ineligible to take the credits and
deductions that you are used to.
6. Celebrate your success—frugally.
The journey to financial independence doesn’t mean you should deny
yourself anything beyond the absolute necessities of life. Life is a
marathon and constant hard work can lead to burnout. A fun night out can
go a long way towards maintaining your sanity.
What’s important is doing so in moderation. Buying a new gadget or
planning a vacation should depend on the size of your raise and what you
have budgeted for.
In Short
Congratulations on your raise! You’ve clearly done a good job and
should be proud of yourself. Celebrate modestly and then get back to
work building a better future for you and your family.