Getting a raise is probably one of the best feelings in the world. After all, it boils down to your boss essentially saying, “You’ve done an excellent job and deserve to be compensated.”
However, it can also be a double-edged sword. Sure, you’re going to make more money, but that feeling of financial well-being could also go to your head and lead to some poor financial habits. The trick to getting a salary increase to really pay off is to make the right choices in the days, weeks, and months following it.
My husband recently switched to a new position at his company and received a raise. At first, we were excited about the opportunities it offered. However, after the dust settled, I found myself feeling more anxious about the new income, not less. Rather than being relaxed and happy, I was worrying about spending our new windfall before it even hit our bank account, and about making subsequent, possibly unwise, adjustments to our lifestyle simply because the money was there to spend.
How to Handle a Raise
The trick to making your pay raise work for you is to plan properly where each new dollar should be spent. Those big purchases you’ve been putting off are going to be very tempting now, but it’s important that you keep your priorities in order and avoid making unwise choices. If you’ve received an increase in pay, celebrate modestly, let it sink in, and when you’re ready, begin planning what to do with the extra funds.
1. Wait a Few Weeks
You may be surprised by how much of your raise goes to taxes and other withholdings. Divide your new pay increase by 26, tack it onto your biweekly paycheck, and then determine the portion that goes to the government and the portion you get to keep. If that proves to be difficult, simply wait a couple of pay periods before making any extra purchases to see how your new raise is apportioned and how much you get to hold onto.
2. Reassess Your Budget
Before you allocate money to new budget categories or decide to add more money to underfunded ones, try assessing your budget and cutting some of the fat. If you don’t already use one, of course, now is the time to start.
To create a budget, list all your outgoing expenses, including fixed monthly bills and discretionary purchases such as meals out, concerts, and vacations, as well as amounts you put toward savings, investments, and donations. Review your bank and credit card statements for the past three months to get a good idea of your history with discretionary purchases. And don’t forget to budget for non-monthly expenses, such as biannual insurance payments and annual taxes. Then, compare all of these to the amount of money you earn.
After you’ve reviewed your budget, start thinking about where your raise is going to do the most good. For example, you may want to put more toward savings or paying off any debts you may have before pulling the trigger on that new iPad or taking that Disney vacation. Just because you’re earning more money doesn’t mean you should throw it away on purchases you don’t need. Extra funds should first go to retirement accounts, general investments, and other wealth-growing tools.