Money Milestones: What to Do When You Get a Raise

Whether you’re getting a large raise or a small cost-of-living increase, receiving a bump in pay is always positive news. A bigger salary can help you live a more comfortable lifestyle and plan for the future. But before you start spending your extra income on luxuries, it’s important to ensure that your newfound wealth is allocated wisely. Here’s what to do when you get a raise.

1. Update Your Monthly Budget

If you already have a monthly budget, the first step is to update it to include your raise. Plugging your new income into your budget will show you how much extra money you have and help you allocate funds accordingly. While you may have some wiggle room for recreational spending, focus on important financial goals such as retirement or emergency savings first.

Tip: "While there’s nothing wrong with spending extra money that you take home each month because of a raise, many people may be able to identify more beneficial uses for those funds," says Drew Feutz, certified financial planner at Market Street Wealth Management Advisors.

If you don’t already have a budget, now is the time to create one.

2. Increase Your Retirement Contributions

When you receive a raise, it’s a good long-term strategy to allocate a portion of it to your retirement contributions. If you increase your retirement savings using your pay raise, you won’t miss the extra money as much as you would if you had maintained the same salary.

If you participate in a 401(k), it’s easy to adjust your contributions with your plan administrator. You can set a new contribution percentage and let the funds automatically come out of your paycheck. Even a small increase in your monthly contributions can drastically increase your retirement savings over time.

Example: If you receive a 3% pay increase, increasing your contributions by just one percentage point will boost your savings and still leave you with a nice 2% bump in your take-home pay.

If you aren’t already saving for retirement, getting a raise is the perfect opportunity to start. If your employer matches 401(k) contributions up to a certain point, take advantage of this "free money" to set yourself up for retirement.

3. Pay Off Debt

Paying down debt is a high priority for many people, especially after receiving a raise. The interest that debt accrues can take a big bite out of your finances, so using your raise to pay down high-interest debt is a smart move.

Tip: "Getting rid of high-interest rate debts like credit cards is a high priority for many (especially after the holidays) and could be a great option for where to direct extra money," says Feutz.

Consider focusing on debt with the highest interest rate first (the avalanche method) or paying off smaller debts first for quick wins (the snowball method). Both strategies can help you get out of debt faster and save money in the long run.

4. Increase Savings

Everyone should have an emergency fund to draw from when unexpected expenses arise, such as home repairs, medical bills, or car breakdowns. A common recommendation is to save three to six months’ worth of income.

If building a large emergency fund seems daunting, start by diverting a portion of your raise into your savings each month. High-yield savings accounts, certificates of deposit, and money market accounts can grow your savings faster than traditional savings accounts.

5. Increase Your Life Insurance

If your salary has significantly increased, your current life insurance policy may no longer provide adequate coverage. The amount of life insurance you need depends on various factors, including family size, debts, number of dependents, and homeownership. A good starting point is to aim for coverage that’s 10 to 15 times your current income.

Tip: Healths Insured offers an easy way to find a policy based on your new salary.

6. Review Your First Paycheck

When your first bigger paycheck arrives, review it to ensure accuracy. This will also give you a clear picture of your actual take-home pay after taxes and deductions. Use this information to fine-tune your budget and adjust your spending and saving plans.

7. Celebrate

Once you’ve allocated your newfound income toward financial goals, it’s okay to celebrate with what’s left over. Consider planning a vacation, saving for a new gadget, or treating yourself to a night out. Getting a raise is worth celebrating, and balancing financial responsibility with enjoyment is key.

Tip: "A hybrid approach could be to make sure that you’re intentional with half of your raise by directing it to high-interest debt, savings, or other financial goals while allowing yourself to spend the other half," says Feutz.

Want more tips on managing your finances? Check out our finance blogs.

Description: A person celebrating after receiving a raise, highlighting the importance of balancing financial responsibility with enjoying newfound income.