Congratulations. This is great news and you should be happy. Getting a pay increase makes you feel like all the hard work you’ve done is paying off.
But when you get a salary increase or a new job with a higher salary, you might start thinking about how to spend it or maybe you might already have a list of ideas and things to buy.
Before I learned about personal finance, my default was to buy, buy, buy, but now, it’s not just buying stuff only, it’s that plus the things I’ll talk about in this post.
When you get a raise at work, you might want to do one or more of the following things to make the most of the new salary.
When you get the news of a raise or higher paycheck, the first thing you should do is calm down. Don’t go out and spend right away, what you want to do is to figure out what the effect of the increase will be.
You want to know things like what effect taxes and other deductions will have on the raise, especially if the raise moves you into a higher tax bracket where you pay a higher tax rate
This question will help you figure out how much your monthly net income will be, which is different from your gross income (income before deductions)
During this time, you can figure out how to save money on taxes based on the tax bracket you are now in.
You can find out all these things either by waiting a few months to see how your paycheck is broken down and what your net pay is or by using an online paycheck calculator.
This is also true if you are a contractor, self-employed, or get irregular extra income. You need to do these calculations right and save enough money for taxes so you don’t find out months later that you owe the government money
When you get a pay rise you should definitely have a look at your budget once you know how much will hit your bank account. Don’t forget that a budget is just a plan for your income, and when your income changes, you need to review your plans.
Depending on the type of budget you use, this could take as little as 10 seconds or a bit longer. For example, if you use a 50/30/20 budget, all you have to do is apply those percentages, but if you use a zero-based budget, you have to look at your budget line by line.
A budget is just a plan for your income, and when your income changes, you need to review your plans.
I think it’s a great idea to look at every line of your monthly budget because you want to be proactive about this, so look at your expenses and figure out where the best places are to make changes to your budget.
This way, you can make sure you’re not giving lifestyle creep a chance but you are instead supporting your dreams and financial goals. You are literally putting your money where your mouth is
We can’t say enough about how important it is to pay off debt, especially high-interest debt, because it saves you so much money. If you get a raise, you can use the extra money to double down on the debt and pay it off faster, saving you money.
Credit card debt, payday loans, student loans etc. are all types of debt with higher interest rates.
Other reasons you want to do this is
Paying off debts can also help build your credit score and personal finances, especially if you want to buy a big item like a house in the future.
Also, since you no longer have to that monthly payment, you have extra cash to put toward your goals.
If you have more than one debt, there are two common ways to get rid of them.
There is no best way because both ways have their advantages and disadvantages, whatever you decide will work as long as you use them consistently.
We don’t pray for the unexpected things that happen in life but we know they do happen, the question is how to protect yourself and your family from the unexpected. Protection might not always mean stopping something from happening, but it could mean lessening its effects.
This means we can do what we can to be ready if they do happen. If you ask me where to start to protect yourself and your family from emergencies, I would tell you to build an emergency fund. If you don’t have a savings account or yours isn’t enough, the raise is a good opportunity to begin one or build it up fast
The general rule for emergency funds is three to six months of living expenses.
There used to be a time when the government, your employer, and a financial planner were in charge of planning your retirement. Not today, now most people can create a retirement plan.
On this blog, you can find everything you need to know and do to start investing right away. Raising your retirement contribution is a great way to shorten the time until you can retire.
The biggest factor that determines how soon you can retire is your savings rate. For example, if you save 10% of your annual income, you can retire in 50 years If you save 64% of your income, you can retire in 11 years
Source: Mrmoneymustache.com
When you get a raise, you should put more money into your retirement account. At the very least, this should keep your savings rate the same.
For example, Ross gets a raise from $30,000 to $35,000. This means that his monthly gross pay has gone up by £400, to $2,910. If he decides to put 75% of that additional money into his retirement savings it will grow faster, (more on this below small raises vs big raises)
Money is just a tool. You could also say that money supports your dreams and values. If you believe in giving, which I do, a raise gives you the chance to give more.
You should have fun, too. You’ve worked hard, so you deserve it. Take some of that raise and spend it on something fun that you will enjoy. The key is “that you will enjoy,” not what your neighbour or friend did because you don’t want to get entangled in that cycle. Keeping up with the Joneses.
This ceebration can cost anywhere from a few pounds to hundreds of pounds, depending on your taste and what you love, but make sure it’s what you love.
You also don’t celebrate every day. That’s called a lifestyle or habit, so celebrate that raise once, enjoy it, tell yourself “well done,” and move on.
I’m sure you’re saving for things other than an emergency fund. Maybe you’re saving for a wedding with the love of your life, a new car so that Mr mechanic doesn’t have to be your best friend anymore, a phone, a house deposit so you can buy your dream house with big gardens, etc. Whatever it is, this is a good chance to boost your savings.
Lastly, but not necessarily last, you should invest in yourself, your growth, and your career. Never forget that you are the golden goose that lays the golden egg, which in this case is your increased income. So the best way to keep producing that golden egg, in the long run, is to take care of the golden goose
Investing in yourself could also mean doing something extra for your health, like buying gym equipment or a supplement, or replacing things you use every day, like your mattress or office chair.
Among this list there is always something to adopt every year, and this is true for most people because most employees get a rise every year, even if it’s just a 3% raise in line with inflation. Someone will say Nd my raise is insignificant, what is 3% of £30,000 in a year merely £75 every month.
Even small raises given every year and used well can go a long way.
For example, Ross is 25 years old, and works in retail with an annual salary of $30,000 a year, he decided he could only save 10% for retirement.
His employer gives pay raises of 3% every year. What will he be worth at age 45 if he adds 50% of his annual pay raise (1.5% of 3%) to his investment? Let’s compare this to Lee, who kept his investment at 10%.
After investing in the same fund for 20 years at age 45 Ross is now worth $100,000 more than Lee just by making small changes to his retirement contributions.
They were both long-term investors who bought low-cost index funds. The only difference was how they spent what seemed like a small raise.
Did you also notice the difference in their savings rate with time? Research has shown that most people’s savings rate stays the same whether they get a raise or not.
Just like Lee’s situation, the amount invested will go up every year because 10% of £30,000 is more than 10% of £40,000, but your expenses are also going up at a very dangerous rate.
Imagine that during this 20-year journey, Ross gets a pay raise of more than 3% at different times, perhaps because he gets a promotion or changes jobs, and he uses the same 50% rule, or maybe 30%, 20%, or 80%. Think about how quickly he will reach his goal of retiring.
I found some general rules about how to handle a raise. I like these rules because they force you to make a choice before you get a raise, this is a smart way of being proactive.
Lifestyle creep is so subtle that if you aren’t careful and make some decisions before that raise, you probably won’t use it well, and it doesn’t feel so bad to invest a future raise.
