Congrats! Scoring a raise is a big achievement, and the extra money is always a welcome guest in your bank account. Figuring out what to do with the additional pay can be a real head-scratcher. Without a plan, it’s easy to spend it and end up no closer to your goals.
Now it’s time to take a few minutes and come up with an action plan to turn your raise into progress toward your financial future.
Make or revise your budget
The first step is to revisit and adjust your budget to reflect the changes in income. If you’re thinking, “what budget?” now is a great time to put one in place. A budget can help you direct your money to the things that are most important to you.
Before you crunch numbers, make sure you know what your new net will be. If your raise hasn’t kicked in yet, use a take-home pay calculator online to figure out what you’ll get on each check.
Next, if you have an accountant or CPA, check in to make sure your tax withholdings are in line with your new raise. You don’t want to end up with a big tax bill at the end of the year if you can help it.
When you’re ready to get serious about a budget, you might consider using a budgeting app. A well-chosen mobile app might help you take control of your spending and put a plan in motion to pay off your debt, build up an emergency fund or save for a trip to Australia to finally get up close and personal with a kangaroo.
Here are a few I like:
- You Need a Budget – a mobile and online robust budgeting system to help you reach your goals
- Clarity Money – a mobile app that shows you where your money is going and offers suggestions to save money on bills you currently pay
- Mint – the OG of budgeting apps that helps you track your saving and spending throughout the month
Already have a good working budget? You get a gold star. Now it’s time to update your numbers and give a job to all the extra dollars you’ll bring home.
Your budget should include a few important short-term and long-term goals. Estimate the total cost and target completion date for each goal and break it into monthly chunks.
Get rid of expensive debt
Debt is costly, some kinds more expensive than others. Typically, debt that has an interest rate over 7% is considered expensive debt (think credit cards), but some people feel that debt at any interest rate is expensive.
A new raise gives you an opportunity to strategically get rid of at least some of your debt for good. If you haven’t done so already, make a master list of all your debt, how much you owe, what your monthly payments are, and the interest rates. With this chart, you can begin to create an action plan to knock out your debt.
There are two popular strategies to get rid of debt:
- Avalanche: pay off the highest interest rate first, then move onto the next most expensive. This method has the potential to save you the most money overall.
- Snowball: pay off the smallest debt first, then move onto the next smallest debt. This method has the potential to be highly motivating, as you might reach milestones faster.
Choose a method and drive the extra cash from your raise towards your debt.
Re-consider your contribution levels
Whether you’re contributing to a 401(k), Roth IRA or a Traditional IRA, it’s a good idea to reconsider your contribution levels each time you get a raise. Here are some things to think about depending on what type of retirement account you have.
401(k) – can contribute up to $19,000 in 2019
- Are you contributing up to the company match?
Roth IRA – can contribute up to $6,000 in 2019
- Are you still within the Roth IRA income limitations for 2019?
Traditional IRA – can contribute up to $6,000 in 2019
For all types of retirement accounts, review your allocations/contributions to make sure they are in line with your current risk tolerance.
Cover up financial risks
You can’t outrun financial risks, but you can answer them with a plan. Risks are a part of life, but how we prepare for them will impact how well we weather each financial storm. Having more money in your paycheck means you can mitigate some financial risks so that when they come up, you’re prepared.
Disability – your paycheck is likely your biggest asset, so it makes sense to protect it. If your employer offers long-term disability insurance as an optional benefit, consider signing up (you’ll probably need to do this during open enrollment). Disability income insurance can also be purchased as a stand-alone policy. Typically, policies cover between 45 and 65 percent of your income for the length of time specified in the policy (for example, two years, five years, ten years or until retirement).
Life Insurance – not having enough life insurance might not offer the level of protection your loved ones may need if something should happen to you. It’s true, not everyone needs life insurance, but for most of us, having enough life insurance is a key element of our financial plan. The general rule of thumb is to have coverage in place equal to at least five to ten times your annual income. Look into term and permanent life insurance to determine which makes the most sense for your situation.
Will/trust – now that you’ve got some extra cash, you can tidy up your estate planning. The most basic step in estate planning is having a will, so everyone who has stuff will want to consider crossing that off their list. You may want to work with a local lawyer that specializes in estate planning. Or, if your situation is less complex, you may want to explore online resources to create a will – but if you choose to do this, be sure to check your local requirements for witnesses and notarization – these vary by state. While everyone should have a will, not everyone needs a trust, but for some, a trust can help protect your assets. Trust & Will offers inexpensive solutions to set up your estate planning documents and share them with your family. Haven Life customers can use Trust & Will to prepare a will for free.
Emergency fund – financial experts suggest setting aside at least three to six months’ worth of expenses for those inevitable unexpected expenses like car repairs or home maintenance. It’s a good idea to save enough money to get by with no income for several months. You may want to establish a high-yield savings account for your emergency fund.
You deserve it! Reward yourself for a job well done for being a valuable employee. Once you’ve made a plan for your money that you are happy with, have some fun. Your reward doesn’t have to be big and expensive. Think small, like a nice dinner out or tickets to your favorite concert. Rewarding yourself will help you stay committed to your other financial goals and continue to give your best at work.
Raises are never a sure thing, so when one does come, don’t forget to pat yourself on the back. Once you’ve popped the cork on a bottle of your favorite champagne, use this checklist as a reminder of the many ways you can put your money to good use and powerfully direct your raise towards the financial goals that are most important to you.
Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER® professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money.
Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Opinions expressed by the author are their own and do not necessarily represent the views of Haven Life.