Good times are here again! Pay raises are back!
The economy is back and looking pretty healthy, so companies are starting to loosen the purse strings a little bit. That means 401(k) matches, bonuses and annual salary increases are all starting to return. Most employers have finished up year-end reviews and are starting to inform employees if and how much of a pay raise they’ll be seeing this year.
Getting a raise is an exciting event. Even the smallest increase in pay gets me thinking about the possibilities of what I could do with that extra cash in my pocket. A pay raise, similar to a big tax refund or other financial windfall opens up the opportunity to blow all that money by making a large purchase. Or more commonly, slowly increasing your spending to match the extra amount you’re now seeing in each paycheck. You’ve probably seen this habit referred to as “lifestyle inflation”.
So, your boss sits you down and gives you the good news that you’re getting a nice bump in pay over the coming year. Now the question becomes: “What should I do with my raise?”
- Pay off Debt – It’s no secret that millions of Americans struggle with debt. If you’re making regular payments to pay off annoying debt like student loans or credit card debt, use a raise as an opportunity to increase the amount of your regular debt payments. Doing so has multiple benefits – you’ll get debt out of your life and reach your goals faster, and you’ll increase your credit score by lowering your debt/income ratio.
- Speed Up Retirement Savings – Increasing your 401(k) contribution percentage by the same amount as the raise your receiving is another popular strategy. After all, you don’t have the money now so you won’t miss it if you put it to work for your future in retirement! This is something I had done with each raise I’ve received in my career. However, due to not having a 401(k) match anymore I’ll be putting this year’s raise towards my IRA and other investment accounts.
- Save or Invest Elsewhere – If you’re already maxing out your 401(k) and don’t have any debt. Using a raise as a chance to invest or save towards your other goals is the next logical step.Speed up your savings towards that rental property, give your freedom fund a shot in the arm, give P2P lending a try, open up a college fund for your kids, or use it to finally get your side business up and running. Whatever your other investing goals are, an increase in pay gives you a chance to start reaching them faster.
- Loosen the Budget – If your budget is squeezed so tight that there is no room for error, a raise could be just what the doctor ordered. It’s OK to use a raise to give yourself some breathing room in your budget. Whether it’s by allowing yourself to spend a little more at the grocery store, or by allowing you to fund your emergency fund a little easier. A lot of the raises we receive are meant as “cost of living” increases. So don’t be ashamed if you need the raise just to make your day-to-day life a little easier. It’s only when you start spending more in discretionary areas with each raise that you’ll get yourself in trouble.
- Reinvest the Dividends – When investing in stocks it’s a popular strategy to reinvest the dividend a company pays you into more shares of the stock. You can take the same approach when you’re given a bump in pay. Your employer gave you the raise because you’ve been kicking ass at your job. So why not take that raise and reinvest it back into yourself?!Is there a class or seminar you could take that would improve your standing in the office? A new certification you could try to achieve? A professional or networking group you could join with the money? Even a new suit or new clothes to wear on the job. Anything that would increase your chances at getting future raises is a good use for your current one.
- Treat Yo’ Self! – With the qualification that – A) You’re not in debt. B) Your retirement savings is in order. C) You’re in pretty damn good financial shape.If that sounds like you, then go ahead, do whatever you want (within reason)! You worked hard for that raise and you’ve got your financial house in order so treat yo’ self! That’s the great thing about being financially responsible, you can splurge now and then and not feel guilty about it because you know it won’t derail any of your other financial goals.
Are you getting a pay raise this year? If so, what do you plan to do with the extra money?
What other advice would you give to someone who doesn’t know what to do with the raise they’re getting?