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.
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.