By Holly Tomlinson
If you’ve recently received a raise, or you’re planning on having the talk with the powers that be soon, congratulations. This is an exciting step in any professional career, and the money earned shouldn’t be regarded lightly.
Look at Your Budget
You’ll need to look back at your budget and do some spring cleaning of sorts. Assess your budget as it is now and determine where you could decrease unnecessary spending. Take a look at your credit card statements from the past few months and take note of any purchases that you could have done without. Once you’ve reviewed your budget, consider where you could put your raise funds and make the biggest practical difference. Be sure not to automatically spend your raise without deciding the best place in your budget is should go.
Emergency Savings Fund
If you don’t have an emergency savings fund, then now is the time to create one. I would recommend having a six-month cushion in case of job loss or emergency. The expenses your emergency savings fund should be able to cover are extensive; from rent, mortgages, and utilities to food expenses, even health care to transportation. There seems to be a never-ending list of items you’ll be responsible for even in the unlikely case you lose your job. Establish automatic transfers when receiving your paycheck; you won’t miss the extra money that automatically goes into your savings account, but you will be glad you have it when a rainy day inevitably comes.
Pay Off Pre-Existing Debt
If you have debt hanging over your head, use the extra funds you’ve been given to start paying off those accounts, focusing first on the ones that are charging high-interest rates. The sooner you get out of debt, the less you will pay over time in interest, and your credit score can start improving the second you settle your debts. Some choose to pay off accounts in the opposite manner; by knocking off smaller debts, your list of accounts gets smaller quicker and may make the debt seem less overwhelming. If your debt is serious, then your raise should definitely go towards paying back what you owe to get you out of hot water with the IRS. If you’re in need of financial advice how to settle outstanding balances with the IRS, use a company like CTax to figure out the best option for you.
Now that you’ve been given more, make sure you give back if you have the extra funds available within your budget. Donating to charitable organizations makes you eligible for tax deductions and will relieve the negative effects of decreased deductions and credits that may have come with your change in pay grade.
Once you’ve determined how your raise can be factored into your daily and monthly expenses, give a glance to the future. Putting more money in your retirement fund means you’ll have higher retirement income and potentially be able to retire sooner than expected. Consider contributing to a Roth IRA. You’ll pay upfront taxes on your contributions, but once you pull it out, you can grab it tax-free. If your employer matches your 401k contributions, make sure you put more into when possible.
Make Strategic Purchases
Just because you now have more money, it doesn’t mean you should spend it on anything. Rather than hit the ground running by throwing your hard-earned income towards frivolous purchases, it’s imperative to think before you buy. Try to make purchases that will pay you back in the long run. Maybe it’s time to get a new energy efficient appliance that will pay for itself with the amount of energy it saves in the long run. As you look at purchases you want to make, prioritize those which have the potential to save you money in the long run.
What Not to Do
There are several things you shouldn’t do, at least not in the first few weeks and months of receiving your raise. Signing the lease on a more expensive apartment or home, funding a business venture, and loaning out money may seem doable once you’re making more money, but these expenditures can actually come back to bite you. Be responsible with your raise, and don’t spend more simply because you have more money coming into your account.