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I Got a Raise! What Do I Do With It?

Alexis O'Connell

There are a million ways to measure how much you’re winning at life. Getting a raise? Well, that's certainly one of them.

After you’ve toasted your accomplishment, reward yourself with the gift of long-term financial security by mapping out a plan for your new income. Investing your raise in your financial future ensures that you will get the most out of your money. Since the dough is new to you, it will be easier to set aside now than it will be later. Here's how to take action now.

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1. Reassess Your Financial Situation

When a big change takes place, it's often beneficial to take a step back. Sit on it before you spend it. Now, is a great time to return to your financial goals. (Don't have any? Now is a good time to start!)

Take a look at your goals and reassess. Are there important things you forgot to include the first time around? What items have been neglected the most? Which savings categories could use a boost? Update your financial goals and recommit to following through.

On a smaller scale, review your monthly budget. Increase spending limits where money was especially tight (you did get a raise after all), and adjust your numbers as needed. Warning: Don’t get carried away with unnecessary spending! (See “What Not to Do” below.) 

2. Get Out of Debt


">Americans struggle with debt of some sort. The average American household has $15,675 in credit card debt alone. 

Paying off bad debt should be a top priority after getting a raise. Otherwise, your new income is at risk of going towards fees and steep interest rates incurred by credit card and other high-risk debts. Set up a plan to pay off your debt. Write it down and follow it. While the repayment doesn't have to happen all at once, having a plan ready will help alleviate the stress that often arises with owing money. Some may say there's such a thing as "good debt", but be careful, as that may not always be the case

3. Prep for an Emergency

Your boosted income may have quieted some of your immediate financial worries. Take a few concrete steps to make the feeling of financial security last.

Start by setting aside some of your new income into an emergency savings account, or top off an existing one if you have it. Having money put away that’s specifically for unforeseen expenses ensures that an incident won’t derail your financial plan. You never know when an unexpected expense will arise. Unanticipated events can be anxiety-inducing. Having money prepared will be one less stress to think about in an uncertain time. 

Another way that you can prepare for the unexpected is by reviewing your insurance policies. Ensure that you have the adequate amount of car, life and home insurance. If you need to boost your coverage, plan the increased expenses into your new budget.

4. Invest

What's better than money? Money that multiplies itself. Make your money work harder by investing a portion of your new income. Consider investing in stocks or start a plan for your retirement. Check with your employer, and if you aren't already enrolled, consider starting a 401K at work. You may also consider starting an IRA. 

If you’re not sure where to start, seek out a professional that can offer personal finance and investment insight. The addition of new income is a perfect time to chat with a financial advisor. Here’s how to find a financial advisor that fits your needs if you’re just starting the search. Be sure to choose a financial advisor who you trust and feel comfortable with. Ask them all of your questions—that's what they are there for!

5. Treat Yourself

You worked hard to earn your raise, so celebrate your achievement! Putting your new money towards long-time financial goals won't feel like a disappointment if you treat yourself to a little immediate gratification. Do what you love. Take up a new hobby, purchase that car, go on a vacation or redo that room you've been waiting to remodel. Just make sure that you stick to that set "Fun and Entertainment" budget. 

What Not To Do: Misconceptions and Mistakes

Falling prey to these common mistakes and misconceptions after receiving a raise can eat your money before you even get your first spiffy paycheck.

Common misconception:

Getting a raise will bump you into a higher tax bracket and you’ll end up making less money than you were before.

The reality:

Only the amount of your earnings that extends into the higher tax bracket will be taxed at a higher percent. Don’t sabotage a raise because you think you’ll save on taxes.

Common mistake:

A raise means that you can start living large and that your new income can go towards the finer things in life and fulfilling your wants. 

The reality:

This kind of “lifestyle inflation” can drive your personal finances into the ground. Increasing your spending before securing financial stability with your new salary is unwise. Hold off on making large purchases and lifestyle changes right away. It's important to live within your means. Start there, and then decide whether any lifestyles changes are viable or realistic. 

Saving money is important and a raise can self-create more funds when used to its full advantage, without cutting back on existing expenses. Take advantage of the opportunities a raise brings—first, plan for future financial security, and then enjoy the fruits of your labor.