There’s a million ways to measure how much you’re winning at life. Getting a raise? 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’ll get the most out of your money. And since the dough is new to you, it will be easier to set aside now.
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1. Reassess Your Financial Situation
When a big change takes place, it can help to take a step back. If you’ve already created them, now is a great time to return to your financial goals.
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, 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
Most Americans struggle with debt of some sort. The average American household has $7,281 in credit card debt alone. (via Federal Reserve, July 2014)
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.
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, or top off an existing account if you already have one. Having money put away that’s specifically for unforeseen expenses ensures that an incident won’t derail your financial plan.
Another way that you can prepare for the unexpected is by reviewing your insurance policies. Ensure that you have adequate car, life, and home insurance, and plan the increased expenses into your new budget if you boost your coverage.
Money is best when it multiplies. Make your money work harder by investing a portion of your new income, especially in your retirement.
If you’re not sure where to start, seek out a professional that can offer personal finance and investment insight. A supplement in income signals that it’s a good time to chat with a financial advisor. Here’s how to find a financial advisor that fits your needs if you’re starting the search.
5. Treat Yourself!
You worked hard to earn your raise, so celebrate your achievement! Putting money towards long-time financial goals will feel less like a punishment when you treat yourself to a more immediate enjoyment.
What Not To Do: Misconceptions and Mistakes
Falling prey to misconceptions and common mistakes after receiving a raise can eat your money before you even get a spiffy new paycheck.
Getting a raise will bump you into a higher tax bracket and you’ll end up making less money than you were before.
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.
A raise means that you can start living large and that your new income can go towards the finer things in life.
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.
While saving money is great, a raise can rake in more money without the toils of cutting back on your existing expenses. Take advantages of the window of opportunity after you receive your raise to plan the extra income into your future financial security, and enjoy the fruits of your labor.