You’ve worked hard all year, your boss has noticed, and you just learned that you’re getting a pay raise! First, a happy dance.
Now that you’re boogied out, let’s think through what you’re going to do (and not going to do) with this raise.
The best thing you can do when you first get a raise is to do nothing. That’s right, instead of planning out exactly what you want to do with it, give yourself two weeks or a month to learn the exact additional amount on your next paycheck. Uncle Sam is still going to need to take his cut, and hopefully you’ll be putting more towards your retirement. So before you go out and start spending your raise, learn exactly how much of that raise you’ll see on each paycheck.
- Spend (Reasonably)
You earned the raise, so you have certainly earned the right to celebrate! You’re going to do this reasonably, though, because you also know you’ve got bigger fish to fry. We suggest you take the first month’s raise that you receive, and use that to celebrate. Let’s assume you get a $10,000 raise. That means after taxes (30%) you’d have about $7,000. Now divide that by 12 and we’re looking at about $583 that you can go and spend on anything you want (vacation, a night on the town, new tech, etc.). This way you've celebrated, but it still leaves $6,417 for you to put towards more meaningful things.
- Achieve Your Financial Goals
These are those meaningful things you’ll want to put that money towards. Rather than giving yourself a lifestyle inflation, put this money towards paying off debt, building your emergency savings, investing, or whatever financial goal you’ve established. A new raise will give you the cash flow to accomplish these goals more quickly than you originally planned.
Now let’s talk about what not to do because there are plenty of pitfalls and mistakes you can make when you find out you’re receiving a raise.
Not To Do
- Lifestyle Inflation
This is the most common mistake people make when they receive a raise. It’s also very likely the reason why one-third of households making more than $75,000 live paycheck to paycheck. Lifestyle inflation is viewing your raise as an opportunity to spend more money. A good way to combat this is to use the TSL budgeting method (30% taxes, 20% savings, 50% life). By using this budgeting method, you are actually giving yourself some lifestyle inflation, but you’re also increasing your savings and appropriately planning for taxes.
- Increase Debt
Another nasty pitfall of receiving a raise is when you then use that money to take on more debt. Sure, you could afford the monthly payments on a $50,000 car now, but where does that put your financial goals? Maybe you want to move into a bigger, newer house, but can you also afford all the furniture and upkeep it will then require? Be careful that your newly increased income doesn’t actually trap you into negative cash flow.
- Get Comfortable
You’re excited that you received a raise, but that doesn’t mean it’s time to lay down on the job. Be sure to keep pushing and excelling at work so that you’ll continue to see job growth and more promotions in the future.
These are a few of the important dos and don'ts for receiving a raise. For more ideas on what you should and shouldn't do with your raise, listen to our podcast on this topic!