Anyone would undoubtedly be ecstatic after knowing that they’d get a salary increase. For many, a raise means being able to spend more on better food and clothing, hobbies, vacation trips, and other luxuries that they may enjoy and benefit from in the short-run. Some may even end up making the huge financial blunder of adopting an expensive and high-maintenance lifestyle to fit with the bigger paycheck. This isn’t a smart way to deal with a pay raise.
A pay raise should be seen not as an opportunity to spend more but to save and invest; while it’s okay to allocate more on your needs and wants, it’s important to think long-term and see how being smart with your increased earning capacity can yield financial freedom and security in the future. As such, we’ll be taking a look at a few practical things you should do once you finally get that hard-earned raise:
#1 Know Your Net Income
Once you’ve confirmed that you’ll be getting a raise, it’s important to verify how much the increase is both in terms of the salary, other bonuses, and the deductions. Before you can start planning out your new budget allocation, you’ll need to know exactly how much you’ll be taking home after all the deductions, such as withholding tax and also other recurring (non-tax) deductions such as your health insurance or even your gym or meal subscriptions at work. Once you’ve finally calculated your net take-home pay, you’ll be able to plan your finances accurately.
#2 Pay Off Current Debt
The thought of finally getting your hard-earned pay raise only to have a huge chunk of the increase allocated to paying off debt is quite unappealing. However, you have to realize that you’ll be dealing with debt sooner or later, and by paying off your current debts, you’re paying peace of mind — this may not be as satisfying as splurging, but it can be a huge step towards financial freedom. So, as unsavory as it may be, it’s best to list down all your current debt from student loans, auto loans, credit card debt, and high-interest loans/debts then allocate a big part of your raise into wiping them off.
#3 Tweak Household Budget Responsibly
You’d want to minimize changes to your monthly household spending to a minimum. If you’re able to keep your monthly spending as-is, this means you’ll be able to allocate more towards your savings and in paying off debts. You should never fall into that trap of adopting a more expensive lifestyle as it would result in you not being able to save or invest, but it may even lead you to incur more long-term debts thinking that your raise would be able to cover it. If you have to increase your household spending, make sure that it isn’t wasteful, like increasing food allocation to purchase healthier food.
#4 Save and Invest
The huge chunk of your raise should be allocated to eliminate debt and to grow your savings. It’s recommended that you increase your monthly allocation to your retirement fund, and also start building your emergency fund (to be used in case of emergencies such as job loss, unexpected medical bills, house repairs due to calamities, and so on). It’s also the perfect time for you to consider investment options so you can ‘grow’ your money. There are financial management firms in West Jordan that can help you not only in investing but making smarter financial decisions for you and your family.
A raise isn’t just an increase in spending capacity, but a huge boost to help yourself be more financially secured and ready in the long run. However, this doesn’t mean that you shouldn’t treat yourself for getting that raise, so don’t forget to allocate a reasonable amount for you to splurge on whatever you want, you’ve earned it!