What to Do First When You Get Raised
You have worked hard for this, and the day has finally arrived: you receive your first salary, reflecting the increase that you have successfully negotiated . But, as anyone who has ever had windfall profits will tell you, money tends to slip away from you. Today you look at your newly cleared bank account, and the next day you see the same modest balance that you are used to. Where did the money go?!
(My guess: online shopping and takeout. This happens to the best of us.)
This is why, when you negotiate a pay raise, the next thing you need to do – wipe the sweat off your palms – is figure out what to do with that extra money you deserve. You can’t just leave it to chance, planning to save money by having a little fun with that first paycheck. Instead, you need to give your money a job.
Automate promotion
Before you decide what to do with your extra money, you need to know where to put it. “It’s easy to lose sight of a small raise,” said Lillian Karabike, personal finance educator and author of The Money Guide for cats . “With only $ 60 or so of extra dollars in salary, it seems like all that money is just slipping out of your fingers.”
She recommends creating a system to use your raise to meet your financial goal. Unless you plan on transferring this money to your employer-sponsored retirement account, which will automatically transfer funds, you will have to hide the money from yourself to avoid wasting it.
“Most employers will allow you to split your salary into separate accounts using the form you get from the HR department,” she explained. “If you get a 3% raise, you can set up 3% of each paycheck to a dedicated savings account.” This designated account can be where you accumulate funds for your purpose of savings, or it can be a temporary storage location – say, if you want to automate transfers from that account to your credit card account .
Whatever you do, take a few minutes to set up a system that will save you from confusion with your new money. “If you set up your direct deposit or create a suite of automatic transfers, you won’t feel the sometimes painful squeeze in savings,” Karabaich said.
Where to put your new money
Now that you know you need to invest in a special place instead of leaving the extra income to chance, you have three main options for what to do with your money.
You can use it to pay off your debt . If you have student loans, credit card debt, or checking medical bills, using your extra income can help you pay them off faster.
If you choose this route, go into debt with the highest interest rate first. For example, strictly hypothetically, if you have credit card debt at 18%, car loan at 4%, and student loan at 3%, there is no point in worrying about additional student loan payments when you have that credit card. interest canceling your brilliant new raise.
Focus on paying off the debt at 5% or more interest first , and then gradually decline. And remember, if you’re in a lot of debt, it will still be a marathon, not a sprint.
If you are out of debt – and even if you do – you may want to consider channeling your money into retirement savings . This option is perhaps the easiest one because you can simply adjust the percentage of your salary so that it goes into your 401 (k) every time you get paid. If you don’t have an employer sponsored retirement account, you may have to do a little extra work to increase your contribution, but it’s still an action to set and forget.
Karabike remembered the big promotion she had once received: from $ 30,000 to $ 39,000 a year. “The first thing I did was log in and increase my 401 (k) contribution by $ 4,500 a year,” she said. “Half of my promotion went into retirement, and I still felt like I was getting a big raise.” She created a win-win by increasing her discretionary income and strengthening her future financial security.
Or you can use your gain to save . If your emergency fund is far from ready for unexpected spending, you can increase it by channeling your additional funds there. Already have a healthy emergency fund? You may have other goals, such as upgrading an old car or saving money on your house.
If you’ve already used up your tax-free retirement plan, you may want to make some short-term investments. This does not mean that you need to suddenly become a day trader, but perhaps you are keeping your short-term savings in a brokerage account to allow them to grow regardless of your desire on the next rainy day. Of course, you will want to pay off all your debts and make sure you are financially stable before going down this path, but at least you know what to do next if and when you get to the end of the more obvious options for distributing your new funds.
Save yourself some fun money
You may have noticed that Karabaich did not put all of her $ 9,000 in savings. It is important to remember that not every cent of your raise needs to go into one of the baskets listed above to be valuable to you.
As we discussed earlier, self-control can make achieving financial goals more manageable, but it can also be frustrating. Everyone loves to see progress, and loves to see it right now, please.
How much you should automatically procrastinate rather than enjoy yourself is up to you. If you’re working to get out of debt, you might decide to use a 75% after-tax increase to pay off debt, 15% to emergency savings, and 10% to an entertainment budget. That 10% might not get you far depending on the increase, but that extra few dollars a week to spend on a coffee date with a friend or a movie night can make your trip that much more enjoyable.
A bit of lifestyle imitation ? Take action. Enjoy your hard earned money. (Maybe even order food to go.) But don’t waste that money without a plan to ensure that you save what really matters.