What to Do When You Get a Raise

A raise represents a significant opportunity to enhance your financial standing and pursue long-term goals. It is a chance to re-evaluate your current financial situation and make strategic decisions for greater financial security and growth. This guide will help you manage and optimize your increased income, transforming a simple pay bump into a catalyst for substantial financial progress.

Updating Your Financial Plan

Receiving a raise requires re-evaluation of your financial plan. First, assess your new net income after taxes and deductions. This figure forms the foundation for revising or creating a budget that reflects your enhanced earning capacity. A budget guides how your money is allocated across various categories.

When adjusting your budget, differentiate between fixed and variable expenses. Fixed expenses, such as rent or mortgage payments and loan installments, generally remain constant, while variable expenses, like groceries, utilities, and entertainment, can fluctuate. The 50/30/20 rule suggests allocating 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debt repayment. This structure balances essential needs, discretionary spending, and future planning. Additional funds from your raise can increase allocations to savings or debt reduction.

Optimizing Your Increased Income

Next, strategically deploy your new funds to meet financial objectives. Prioritizing high-interest debt repayment often yields immediate benefits. Credit card debt, for instance, typically carries high annual percentage rates (APRs). Directing extra payments towards these balances can significantly reduce the total interest paid and accelerate debt freedom.

After addressing high-interest debt, bolster your emergency fund. Experts recommend three to six months’ worth of essential living expenses in an accessible, interest-bearing account. This fund acts as a financial safety net, protecting against unforeseen events like job loss or medical emergencies without resorting to new debt.

Increasing contributions to various savings vehicles is another impactful way to optimize your raise.
General savings accounts: For shorter-term goals like a down payment or significant purchase.
Retirement savings: Boost contributions to a 401(k) or similar workplace plan. For 2025, individuals can contribute up to $23,500, with an additional $7,500 for those aged 50 and older.
Individual Retirement Account (IRA): Limits for 2025 are $7,000, with an additional $1,000 catch-up contribution for those aged 50 and over.
Health Savings Account (HSA): If you have a high-deductible health plan, an HSA offers a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. For 2025, HSA contribution limits are $4,300 for self-only coverage and $8,550 for family coverage, plus an extra $1,000 for those aged 55 and older.

Controlling Spending Habits

A common pitfall after receiving a raise is lifestyle creep, where increased income leads to a proportional rise in discretionary spending. This phenomenon can undermine long-term financial progress, as higher earnings are simply absorbed by increased consumption rather than being directed towards savings or debt reduction. Maintaining financial discipline is key to mitigating this tendency.

One effective strategy to counter lifestyle creep is automating your savings. By setting up automatic transfers from your checking account to savings or investment accounts immediately after payday, you ensure that a portion of your raise is saved before you have a chance to spend it. This “pay yourself first” approach makes saving a consistent habit rather than an afterthought. Differentiating between wants and needs also helps in conscious spending.

Needs encompass essential expenses like housing, utilities, food, and transportation, while wants include discretionary items such as dining out, entertainment, and non-essential subscriptions. Prioritizing needs and setting clear spending limits for wants can help you manage your increased income effectively. Regularly reviewing your spending habits against your budget helps identify areas where you might be unknowingly increasing your expenses.

Revisiting Your Overall Financial Strategy

Beyond immediate allocation, conduct a holistic review of your financial strategy. This broader perspective ensures that all aspects of your financial life align with your updated income and future aspirations. Evaluate existing financial products and plans.

Review your insurance coverage, including health, life, and disability policies. An increased income or new responsibilities might necessitate adjustments for adequate protection. Understanding the general tax implications of a higher income is also beneficial. The US tax system operates on a progressive scale; while a raise might push a portion of your income into a higher marginal tax bracket, only the income falling within that bracket is taxed at the increased rate, not your entire income. This helps in planning for tax obligations and recognizing that your overall tax burden may not increase as dramatically as some might assume.