7 Smart Money Moves After You Get a Raise
Getting a raise at work often means more money in your pocket and an improved financial state, along with a boosted sense of confidence that you’re doing a great job. According to the Economic Policy Institute, hourly wages increased 2.5 percent in the past year, and in 2018, most Americans will experience a 3 percent pay bump or even higher, based on the results of a survey done by Aon.
If you do score a pay raise, then you’ll want to reevaluate your financial habits and make smart choices to make sure any salary increase pays off for months to come. Here are seven expert money moves to keep in mind after receiving a raise, so your state of mind—and your bank account — can rest easy while feeling flush.
Keep Your Lifestyle in Check
Justin Howell, CEO of Rize, says the smartest — and most counterintuitive — thing you can do upon getting a raise is to basically pretend you didn’t get it.
“There’s so much temptation to start spending more when you get a raise, but the single best way to build wealth and financial security is to keep your lifestyle expenses in check as you build your income," he said. "It’s a good time to check in and make sure that you are saving enough and putting it towards the right things.”
“The knee-jerk reaction to getting a raise is fantasizing about all the ways you can spend it on upgrading your lifestyle, but there are other ways to put your money to use that will make you much happier long-term,” explains certified financial coach Emily Shutt. “Focus on cultivating a lifestyle that you can afford on the income that you already know you have, and then anything additional that comes in can go to debt reduction, emergency fund building, retirement saving, and investing — in that order.”
Start with analyzing that very first post-raise paycheck, says Ryan Frailich, founder of Deliberate Finances. That way, you know exactly how much you’re taking home. Then, look at your existing financial goals and figure out where you can make an impact or additional progress.
“The worst thing you could do is start spending more, so don’t inflate your lifestyle," agrees Andrea Woroch, a consumer finance expert. "Instead, look for ways to use it strategically. You don’t necessarily have to use all the extra income toward debt or savings, maybe you can use some to take that family trip you’ve been dreaming about. Just make sure you spend intentionally and on the things that you value.”
Raises Are Long-Term, Bonuses Are One-Time
Even though you might consider a raise essentially the same thing as a bonus, it’s not. Howell calls a bonus a singular chance to boost financial goals, and Frailich concurs.
Christy Rakoczy, a financial expert and senior finance writer at Student Loan Hero, suggests using bonuses where you can make the biggest difference in improving your finances. Outside of immediate financial needs, you could start an emergency fund, pay toward debt, or invest in an IRA or savings account.
In contrast, view a raise as a long-term opportunity.
“Raises and bonuses are actually really different,” Frailich says. “With a raise, you really need to make long term plans so you don't lose the whole raise to lifestyle inflation. With a bonus, you've got a one-time decision to make; you only have one chance with the bonus to put it to work. It's critical to sit down and look through what you want in your life, where you are now, and what that bonus can reasonably accomplish.”
Pay Down High-Interest Debt
“Your new increase in income can help relieve some of the burden and stress associated with debt,” notes Leslie Tayne, a debt expert and debt resolution attorney in New York.
“Though paying off debt doesn't sound as enticing as a large purchase, the less debt you have, the more room you can eventually have in your budget," she said. "We recommend tackling your debt with the highest interest first, which in many cases is credit cards. This can save you on the total interest paid and save you money in the long run. For longer-term loans like a mortgage or student loans, consider making adjustments to your repayment plan. Making continuous higher payments over a shorter amount of time will save you tons in interest charges.”
Frailich views high-interest debt as the “biggest stumbling block” to building long-term wealth, so using the extra funds from a raise can be a quick route to getting out of that trap. And if you’re not sure where to start, Shutt says to pay off anything with an interest rate greater than 7 percent before anything else.
“Using part of a pay raise to pay down debts or save for retirement is a must,” says Jeff Proctor, a personal finance expert at DollarSprout.com. “An easy way to do this is by automating what happens with your money each month. For instance, if you currently pay $300 per month for student loans and you get a $500 per month pay raise, set up a monthly $400 automatic payment for your student loan. That way, you'll pay your student debt off 33 percent faster, while still getting to enjoy an extra $100 per month in spending money.”
Bulk Up Your Savings or Emergency Fund
If you don’t have an emergency fund, then use a raise as motivation to save. It may seem like an afterthought, but you never know when an unexpected expense will come your way.
Instead of “getting used” to a raise, says Frailich, take that money and automatically set it aside to build or start your emergency fund.
According to Howell, having at least $1,000 is a good baseline, but then aim to work up to three months salary. Shutt also suggests prioritizing debt payoff before establishing or bolstering an emergency fund as well.
“The amount to aim for varies depending on who you ask, but I like to see clients pull together at least a six-month cash reserve before they do anything else,” says Shutt. “Others will say anywhere from three to twelve months, and it just depends on how risk-averse you are.”
Increase Your 401(k) Contribution
“If you have an employer sponsored retirement plan, such as a 401(k), consider increasing your monthly contribution there,” says Proctor. “This especially holds true if you have not yet maxed out your employer match. For instance, if your employer offers a 3 percent match but you are currently only contributing 2 percent, increasing your contribution by 1 percent means your employer also pitches in another 1 percent. This is an easy way to turn a small win into a bigger win.”
Frailich says most people assume they need to save 10-15 percent of their income for retirement, which can seem impossible — but from his lens, if you save your raises over time, you can actually get to that rate pretty quickly and boost your retirement savings without adjusting your current lifestyle.
No matter what you decide, Tayne says increasing your contributions bit by bit can make a huge difference in your financial future, and the type of monthly income you experience during retirement.
“Beyond that, the absolute best thing you can do is start investing in low-fee index funds that will grow and benefit from compound interest over time,” says Shutt. “You were already used to the salary you had, so unless you're experiencing significant gaps between your true needs and your income (like you can't pay for groceries each month), you should really be routing that money to something that will help you feel more financially secure now and in the future.”
Revise Your Budget
Once you get a raise, Woroch recommends reworking your budget, so you can make adjustments based on your financial goals, and potentially even reach certain targets faster — like saving for a down payment on a house.
“Think about how your raise could help you reach your financial goals faster,” she says. “Extra monthly income could go right toward your credit card bills to help pay down debt faster, applied toward funding your emergency savings, or to increase your 401k/IRA contributions."
“Now that you've considered what to do with your increase in income, it's important to reassess your budget and make changes to specific categories,” says Tayne.
“For example, if you plan on contributing an extra $200 to your retirement fund each month, make sure your new budget accounts for this increase," she said. "Since you now have more money to work with in your budget, this may be a good time to allocate money to areas in your budget that were tight before.”
Reward Yourself with an 80/20 Approach
“I think it's important to acknowledge we're human, and we want to see some sort of immediate benefit from a raise,” says Frailich. “I've found that when I push people to use all of a raise for savings or debt paydown, it rarely goes well."
Instead, he pushes clients to use an 80/20 split: 80 percent of the raise goes to long term goals, and 20 percent goes to something fun and more immediate.
"If someone gets a raise that leads to $500 more dollars in take home pay each month, we talk through setting aside $400 of it for longer term goals or debts, and let the $100 go towards lifestyle spending," Frailich says. "This permission to spend a little makes the savings stick better for a lot of people. While it may not be the best answer from a math standpoint, it's the best from a human standpoint.”
That’s right — in addition to all the practical steps listed above, the experts value treating yourself.
“Unless you are literally drowning in bills and you need every cent of your bonus to just get head above water, take some portion of it and do something nice for yourself or someone you care about,” says Howell. “You deserve it. Just make sure that you save as much of it as you can, because future you will appreciate it.