Getting a raise is wonderful; it’s always nice to know that your company and your boss appreciate the work you do and value you. Of course, the extra money in your bank account is wonderful too. It can be tempting to use it for something fun like a weekend getaway or new clothes. Those things are fine once in a while, but if you’re more responsible with your extra money it will pay off for you more in the long-run.
The key to making your raise work for you is to plan where every extra dollar will go. It’s important to focus on those financial priorities you have instead of being wasteful and regretting it later. When that big new paycheck starts to hit your bank account, here’s the best way to manage it:
Don’t make plans for that extra money until you’ve received at least two paychecks. You may be surprised to find out how much of that extra money will go towards your taxes. Your take-home pay may not be as much as you were expecting. Before making any big plans for the extra income, make sure you know exactly how much of it you’ll have coming in.
Now that you know how much you have to work with, it’s time to recalculate your budget. Before budgeting for the extra money, take a look to see what you may be able to cut. Cutting unnecessary expenses or reducing how much you spend for a category will give you more to work with.
After you’ve reviewed your “before raise” budget, start thinking about where the extra money can go. Decide where it will do the most good. Do you need to build up your emergency fund? Do you need to pay down credit card bills? Do you want to start saving for a down payment on a house? Do you need to start or build your retirement account? Focus on areas that will help you grow your wealth and reduce financial stress.
Invest in your retirement, that is. After your budget has been reviewed and recalculated, you can start looking at putting anything extra towards your retirement accounts. You can open a Roth IRA or increase your 401(k) contributions. Just an extra $50 a month into your retirement savings now could result in over $200 per month in retirement income.
Make sure you plan to use some of that extra income to pay down and pay off debt. In the long-run, it will save you money by reducing the amount of interest you have to pay. Reducing your debt will also help improve your credit score which can help you with larger purchases later on like a car or new home.
Making charitable donations is a nice thing to do, plus, if you donate to tax-exempt organizations, those donations are deductible. You can make a financial contribution to your favorite organizations, or, if you’re not comfortable with giving money, you can donate goods. Many local charities need supplies as much as they need your money.
Making a plan for how you will manage your money after getting a raise will help you to invest that money wisely and make the most of it. Of course, if your finances have changed substantially and you’re not sure how to best manage this change, consider speaking with a nonprofit credit counselor. The conversation is free and can help you figure out your priorities and build a budget that fits your goals.