Scoring a raise can feel like winning the lottery, but that definitely doesn’t mean you should spend it all. Instead, give each dollar a real purpose. Here’s what to do once you come into more cash.
Give yourself more money for emergencies
This is the most important thing to do with the extra money from a bonus if you haven’t already, according to a post on the website of entrepreneur, author, philanthropist, and business strategist Tony Robbins.
“First things first: If you don’t have an emergency fund, this is your top priority. Yes, before investments, and even before paying down debt. A shocking 62% of Americans have less than $1,000 saved for an emergency, and frankly, if you have anything less than three months worth of living expenses, this is where your bonus NEEDS to go. If anything were to happen, say a medical emergency, this cushion could save you from financial ruin,” the post says.
Chip away at your debt
NBC News reports on how to put your raise to good use when it comes to getting rid of pesky debt.
“There’s no better return on your money (except, perhaps, for 401(k) matching dollars) than the one you get paying down high interest rate credit card debt. The return you get is equal to your interest rate — and it’s guaranteed. So if you’re carrying credit card debt, that bump in your salary is money you can use to finally get it off your plate. Start with your highest interest rate card and pay as much as you can toward that one while making minimum payments on the rest; when it’s retired, move on to the one with the next highest interest rate,” NBC News reports.
Don’t become a victim of ‘lifestyle inflation’
LearnVest cautions against blowing through your new money, or engaging in “lifestyle inflation.”
“Consider upping your retirement contributions by the same percentage as your raise — so if your income increased by 5%, so should your retirement contributions. The same goes for your rainy day fund because your emergency savings target is tied to whatever your take-home pay is at the time,” the report says.
The article suggests dedicating at least half of each bump in salary to “financial goals,” like emergency savings, retirement, credit card debt, and more.
Don’t be blinded by the bills — figure out how much you’ll actually get to keep …
Once factoring taxes and other expenses, you might end up pocketing a less than you thought. Direct banking and payment services company Discover Bank advises on how to get a realistic look at your money once you get an upward salary bump.
“When you get a raise, start by figuring out how your boost in salary will affect your paychecks. Just because you’re going to be earning an extra $4,000 per year, for example, doesn’t mean that will be your additional take-home pay,” it says. “You’ll need to factor in your tax withholding and any other deductions from your paycheck (think health insurance, commuter benefits, office gym membership). To determine your net pay increase when you get a raise, subtract your old paycheck from your new paycheck. This is the amount that should inform adjustments to your monthly budget.”
… but have a little fun within your means
There’s nothing wrong with responsibly working toward the things you dream about the most.
A Monster article features advice from Brian Jones, vice president of financial-planning firm Cooper, Jones and McLeland.
“You can set aside a little money from your raise or bonus and painlessly finance a big vacation in just a few years,” he says. “Saving $300 per month in a money-market account earning 3 percent can add up to more than $7,400 in two years.”
This article was first published on September 30, 2017.