7 Things to Do When You Get a Raise at Work
Your raise is an opportunity. Learn how to strategically allocate new income for financial growth, security, and long-term prosperity.
A raise at work represents a financial milestone, offering a chance to enhance your financial well-being. It is an opportunity to strengthen your economic foundation and pursue long-term goals. Rather than simply increasing everyday spending, a thoughtful approach to this new income can lead to substantial financial improvement. This increased earning potential provides flexibility to make strategic decisions for your financial future.
Revisiting Your Financial Plan
Receiving a raise prompts a re-evaluation of your financial framework, beginning with your budget. Updating your budget is important to strategically allocate the increased income. This process involves analyzing current spending habits and identifying areas where new funds can be directed towards savings, investments, or debt reduction, rather than absorbed into previous spending patterns.
After revising your budget, review your tax withholding by adjusting your W-4 form. This adjustment helps ensure the correct amount of federal income tax is withheld, preventing underpayment that could lead to a tax bill or overpayment resulting in a large refund. The IRS Tax Withholding Estimator can assist in determining the appropriate withholding amount.
A raise presents an opportune moment to re-evaluate your employee benefits. Your increased income might affect certain benefit programs, such as life insurance or disability coverage, as their values can be salary-driven. Reviewing these options ensures they remain aligned with your current needs and financial objectives, allowing you to optimize employer-sponsored offerings like retirement plans or health savings accounts.
Amplifying Savings and Investments
A strategic approach to a raise involves directing a portion of the increased income towards building wealth, starting with boosting your emergency fund. Financial experts recommend maintaining an emergency fund capable of covering three to six months of essential living expenses, providing a safety net for unexpected events like job loss or medical emergencies. This fund should be kept in an accessible, liquid account, such as an interest-bearing savings or money market account, to ensure availability without penalties or risk of value loss.
Increasing contributions to tax-advantaged retirement accounts is an effective way to leverage a raise for long-term growth. Employer-sponsored plans like a 401(k) and individual retirement arrangements (IRAs), including Roth IRAs, offer benefits such as tax-deferred growth or tax-free withdrawals in retirement. Many employers also offer a matching contribution to 401(k) plans, which should be fully utilized to maximize your retirement savings. Even a small percentage increase in contributions can yield substantial long-term results due to the power of compounding.
Once retirement accounts and emergency savings are adequately addressed, consider exploring other investment vehicles. This might include contributing to a brokerage account for more diverse investment options or maximizing contributions to a Health Savings Account (HSA) if you are eligible. HSAs offer a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Smart Debt Reduction and Future Planning
Utilizing a raise for smart debt reduction can improve your financial standing, especially by accelerating the repayment of high-interest debt. Prioritizing debts with the highest interest rates, such as credit card balances or personal loans, can save a substantial amount in interest payments over time. Strategies like the debt avalanche method, which focuses on paying down the highest-interest debt first while making minimum payments on others, can lead to quicker debt elimination and greater financial efficiency.
While a raise provides increased financial capacity, it is important to practice responsible self-reward and avoid “lifestyle creep.” Lifestyle creep, or lifestyle inflation, occurs when increased income leads to a proportional increase in spending on non-essential items, potentially hindering long-term financial goals. Thoughtfully integrating some lifestyle upgrades into your newly adjusted budget, rather than allowing spending to expand uncontrollably, helps maintain financial discipline and ensures the raise contributes to financial progress.
Investing in your skills and professional development is another valuable use of new income. Allocating funds towards courses, certifications, or workshops can enhance your career prospects and future earning potential. This investment in yourself can lead to improved efficiency, increased confidence, and a stronger position in the job market, contributing to sustained financial growth.