Just Got A Salary Increase? Here’s How To Make It Work For You
Getting a salary increase is the desire of every worker but the unfortunate thing is that not everyone knows how to put the new fortune to good use.
It is better to find out the right way that getting a raise doesn’t automatically improve one’s financial situation, because without the right financial framework in place, it’s easy to start living beyond your means.
Never Spend In Anticipation
Don’t spend money you don’t have based on anticipation of a coming raise — irrespective of the reasons. There’s no guarantee that plans or promises related to pay raises won’t change in the future.
Revisit Your Budget
It’s easy to overestimate the impact that a raise will have on your finances. When you get a salary increase, update your monthly budget with your new actual take-home income (after taxes, health insurance, etc).
The actual increase in your take-home income is only a fraction of the raise you’re given.
After accurately calculating how much new money you will actually be having each month, ask yourself if there are any expenses that you can cut.
Getting a salary increase is a great time to re-evaluate your existing budget to make sure it still reflects your goals and values. If it’s been a while since you’ve reviewed your personal finances, this is an excellent reminder to check your credit report as well.
Furthermore, ask yourself which variable expenses were affected by your salary increase. If you got raise by taking a new job or relocating to a new city, you may spend more or less money than before on things like transportation and housing.
Knowing where your money can have the most impact is also important. Create an emergency fund and be sure to take advantage of any employer match available to you. Pay off your high-interest debt. Try to budget as much of the new money as possible toward your No. 1 financial goal.
Increase Your Contributions Toward Debt or Retirement
It’s tempting to increase your standard of living after you get a salary increase, but living below your means is critical to building a healthy financial future. It’s much easier to keep your spending at the same level when you get a raise than it is to scale back your lifestyle to trim your expenses later.
Instead of falling victim to lifestyle creep, choose to allocate your increase paycheck toward paying down or saving for retirement. If you are focused on eliminating debt, consider increasing your automatic payments to pay off the debt make quickly. The money you pay above the minimum payment will go toward the debt’s principal, meaning you will pay less interest over the life of the loan.
The best thing you can do after getting a raise is to wait until you’ve acclimated to the new earnings. Eventually, though, you may want to reward yourself and do something fun. Celebrating your raise doesn’t have to involve spending additional money at all.
You may be content with rewarding yourself by enjoying a long weekend with some time off from work or by enjoying dinner or entertainment that already fits within your existing budget.
Wait until after you’ve received a few paychecks at the new amount. Review your budget to reflect your actual take-home income. Set aside a recurring portion of your new income toward paying down debt or investing toward retirement. Give yourself a modest one-time reward for your hard work.