If you receive an extra bump in income after a raise, your mind is likely spinning at all the things you can do with that extra money. But before you do anything, make sure to take a moment to take stock of your financial situation and create a plan that will support long-term economic growth and success.
Not sure what that involves? Here are five financial moves to make after a raise, according to Financial Gym.
Re-Examine Your Finances
More income means changes for your financial situation as a whole. That’s because changes to your earnings also mean changes in your take-home wages, budget, and perhaps your tax burden.
So, to begin, determine what you think your net pay will be. Payroll service ADP’s salary paycheck calculator and hourly paycheck calculator can make this step a little easier. Since it’s an approximation, the amount could differ from what you actually receive.
And if your raise puts you in the next tax bracket above you, your net pay might actually be lower. If you’re uncertain which tax bracket you fall, visit IRS.gov to determine your marginal tax rate.
After you find your net income and if you’ll pay more taxes, give your outstanding credit card balances, loan payments, and other debt payments another look. You should also review your savings goals. Once you do that, you can focus on a specific plan that your raise can help you meet.
Make Sure You Have An Emergency Fund
Preparation is the best way to avoid financial stress. If you receive a raise at work, you should take a look at your emergency savings if you have them, or make a plan to start. Depending on your employer, you might be able to deposit a portion of your paycheck each payday automatically, so you don’t even have to think about saving.
If your employer doesn’t offer this option, you can set up the same thing through your financial institution. Banks and credit unions provide automatic transfers as a free service and are a great way to take your mind off of manually moving your money every month.
Boost Your Retirement Contributions
Besides focusing your efforts on building an emergency savings fund, you should also consider your retirement account. Compound interest means that the more money you save now, the more returns you’ll have when it’s time to retire.
If you already contribute to an employer-sponsored IRA or 401(k), take another look at your current contributions. If you can afford to increase your rate, do so — even if it’s just a percentage.
But if you don’t have a retirement vehicle, contact your work’s HR department to ask about employer retirement programs. When you do, ask about any qualifying criteria, which options you have for a retirement account, and if your employer matches your contributions.
If you can take advantage of employer match, do so, even if it means increasing your amount. This benefit is extremely valuable and something you do not want to miss.
Pay Off Debt
Credit cards are among the most expensive types of debt. If you’re saddled with high-interest balances, you should use your extra earnings to settle these debts. You can find various techniques and resources to eliminate debt, but the most common ones are the snowball and avalanche methods.
With the snowball method, you order your debts from smallest to largest and pay off the smallest one first before moving to the next-smallest balance. It’s a proactive approach that can keep you motivated since you eliminate more outstanding balances faster.
On the other hand, the avalanche method involves ordering your debts in order from highest to lowest interest rate. You begin by paying down the balance with the most expensive rate and work your way down from there. Because the avalanche method centers on interest rates, it can save you the most money in interest payments over time.
As you pick a debt management strategy, consider which alternatives will give you the boost you need to become debt-free even faster. And of course, make sure to pick something you can stick with since that’s the only way any technique will work.
Spoil Yourself (Within Reason)
What’s the point of getting a raise if you can’t reward yourself for your hard work? As important as it is to reassess your finances, you should treat yourself every once in a while. Whether it’s a new gaming console, a spa day, or something else, you should pamper yourself (as long as it doesn’t break the bank).
- Calonia, Jennifer. “5 Money Moves to Make When You Get a Raise.” The Financial Gym – As Seen on the TODAY Show, The Financial Gym – As Seen on the TODAY Show, 25 Jan. 2020, financialgym.com/blog/2020/1/25/5-money-moves-to-make-when-you-get-a-raise.