Whether you’ve earned a promotion at work, received a merit increase or have been given a cost-of-living increase, a bigger paycheck is always welcome. However, that extra money can quickly disappear if you aren’t careful. Considering switching banks to find the best rates and setting up a savings account is a great place to start planning your overall budget. Here are some tips for revising your budget and making your raise work for you.
401(k) Contributions
If your raise is a few percent, consider bumping up your 401(k) contributions. This is especially vital if you aren’t contributing enough to get the full match offered by your employer, if one is offered. Adding an extra percentage point or two now can mean an enormous gain once you are ready to retire.
Open a Roth IRA
For those who are already fully contributing to a 401(k) or are not offered one at work, a Roth IRA is another way to funnel some of your raise into retirement savings. Roth IRAs are set up through an investment brokerage, bank or other financial institution. You then contribute post-tax money into it and usually pay nothing when you make a withdrawal. Look over your options and consider setting up an automatic transfer into your IRA every month. It adds up quickly and can help you pad your retirement funds.
Plump Up Your Emergency Fund
If you have less than six months’ worth of expenses in your emergency fund, use some of your raise to supplement it. In today’s tough financial climate, you may even want to have a year’s worth of expenses in the bank. If you have children or work in a highly specialized field where jobs are scarce, consider putting away a bit extra.
Invest in Yourself
If you have wanted to take college courses or learn more skills to help your career but money woes have been holding you back, consider using part of your raise to save for what you want. Whether it’s a degree, a certification or just a workshop, you will always reap the rewards of continued education and expertise.
Have a Plan
Once you have an idea of how you would like to use your raise, sit down with your budget and make all the necessary corrections. Set up automatic funds transfers if you like to use online banking, and run all of the numbers twice to ensure your figures are correct. Don’t forget to leave a portion of your raise for discretionary, fun spending. You’ve earned it!
Getting a raise at work can allow you to make huge strides in saving and investing in yourself. If you aren’t sure where to start or need guidance, set up an appointment with a fee-only financial planner or a trusted friend to help you get it sorted.
Never too early to start retirement investments. Good article!
My work allows the chance for a reason every 6 months and they always give a raise unless we aren’t meeting their expectations. By far the best company I’ve ever worked for!
I always invest raises and bonuses. Somehow I’ve been able to live on what I have already so I don’t need to increase my spending just because I’m bringing in more money. Just easier to stay put and invest and get wealthy!
Sound advice all the way around. In my book that last point, ‘Have a Plan,’ ties it all together. While it is good to invest in a 401(k) and a Roth IRA, contribute to an emergency fund, etc., it all has to be done within the context of a comprehensive retirement plan.
I like getting raises because it is an automatic raise in to my retirement funds without me doing anything. We’ve tried to live off of my salary no matter a raise or bonus at any time. Somehow we manage to survive when I was making half of what I do so we’ve just tried to keep it the same and then invest the rest.
I’m lucky enough to get a raise biyearly, and every time I do I get to store even more into my emergency savings.
I like the idea of investing in yourself with a pay raise. That could make you smarter / healthier and lead to even more accomplishments / pay raises!
My friend has a great way of thinking when she gets a raise. It is immediately withdrawn and put into her savings or another type of account that she does not have immediate access to. That way she does not even miss it. It is as if it never existed.
Investing in yourself is a great plan. You may not be able to results now but when you develop what your skills and everything you learned, all the hardwork and the hard-earned money you spent for that workshop or training will definitely pay off.
I get a raise each year. I split it between more IRA contributions and increasing our monthly mortgage payment by $100.
It’s so easy just to think about what you can spend the new “found” money on 🙂 this article is great bc we really should be thinking about how to make it work for us. THANKS
#1 priority should be maxing out your 401K, IRA, emergency fund, etc. Great article to highlight this to folks that may be tempted to blow all the extra cash on material junk!
Great article – it is never too early to start stuffing money away for retirement. I try to max out my IRA and 401k just as early as I could in my career.
What I do is act like I didn’t get a raise. I just increase my employer direct deposits, with my raise money going straight into savings accounts. This way I never see the new money in my checking account. It’s my way of socking away more money.
The best way to make your money work for you is to find a way to reduce your taxes on your retirement accounts. To achieve this, you may want to have a mix of tax-deferred and tax-free accounts. Try mixing your tax-deferred accounts, such as a 401(K) or traditional IRA, with tax-free accounts such as a Roth IRA.
Raises are rare in my job. But I always say that if I had to get a raise I would continue with the same budget for 6 months, just so that I could save the extra. But now, that I’m on a debt free mission, I might try to push all of my extra cash towards my property loan.
Great article!!!
The best advice that I ever received early in my career was each time I received a raise I should increase my 401k contributions until I fully max it out. It took eight years but I was finally able to max out my 401k in 2012.
Thanks for sharing!!!
All great tips. I often see people’s lifestyles inflating to meet their new income instead of them investing it and creating a better future.
Great advice! Most folks to not max out their 401(k) and then Roth IRA. If you’re able to divert that extra raise money straight to one of those, you won’t even miss it!
Any raise I get is instantly invested. I was managing just fine without it before so never feel the need to blow it (anymore at least!) I know that money will be better off spent used for early retirement and financial freedom!