Getting a raise is probably one of the best feelings in the world. It’s as if your boss is essentially saying, “You’ve done an excellent job, and here’s your reward”. It is a significant achievement that justifies you and your job are a valuable part of the company. However, it can also be a double-edged sword.
When you receive a raise, you have more financial freedom, and it becomes easy to spend more and end up saving less. In the end, this leads to you having more money at the start of the month but lesser savings than before. Soon you may realise that your previous salary was enough for your financial needs and you have squandered the excess money. That’s a crucial financial habit that one should always avoid. The trick is getting your salary increase to really payoff is to make the right choices in the days, weeks, and months following it.
Here’s how to put that extra income to good use.
1. Check your new take-home salary
Don’t immediately start spending your new money after getting a raise. Instead, take a moment to assess your current financial situation and plan for future financial security.
Start by analysing how the boost in salary will affect your income. Just because you will earn a certain amount of extra rupees doesn’t mean that it will be your additional take-home pay. You need to factor in your tax withholding and any other deductions from your salary. You may be surprised to see that you’re not getting as much as you initially thought. Wait for a month to see how your new monthly salary affects your overall income and work it out accordingly.
2. Reassess your budget
When you have more income, you need to look at your budget again. List all your outgoing expenses, including fixed monthly bills and discretionary purchases such as fancy dinners, concerts, and vacations, as well as amounts you put toward savings and investments. Review your bank and credit card statements for the past three months to get a good idea of your financial history. Don’t forget to budget for non-monthly expenses, such as biannual insurance payments and annual taxes. Then, compare these to the amount of money you earn.
3. Wipe out existing debts
This can be a great time to accelerate your efforts if you are working to eliminate debt. By paying your debt, you are wasting less money on interest and can improve your credit score. Use the technique of paying for small liabilities first before moving on to the larger ones such as credit card debt, home loans or student loans. Reducing your debt load may not give you instant gratification like a treat yourself splurge, but just knowing you are debt-free can be a significant victory. Tightening up and living frugally now can allow you to clean up past financial missteps.
4. Build an emergency fund
Creating an emergency fund is one way to put your increased salary to work. When deciding what to do with a raise, think of an emergency fund as peace of mind if an unexpected expense does creep up. Experts suggest that your emergency fund should cover three to six months of living expenses. If your fund isn’t stocked to this level, use the extra money from your raise to hit that target. Place your fund in a savings account so you can have easy access to the money during an emergency. You can also opt for electronic deposits to ease the process.
5. Gratify your retirement
Dedicate some thought to your golden years regardless of your age. Once your daily expenditures have been addressed, take a closer look at your retirement portfolio. More money means that you can retool your retirement savings. One of the easiest ways to make sure your retirement account is getting the attention it deserves is to make it automatic. Determine how much of your raise you want to place into your retirement fund every year, and then automatically have the amount transferred each month. You do have to pay taxes on those contributions, but when the time comes to withdraw them, they’re tax-free.
6. Treat yourself
You have worked hard to earn that raise, so enjoy it a little. Do something fun. Depending on the size of your raise you may want to buy those pair of shoes you’ve been eyeing for months, or dine at that new fancy restaurant. You could also allocate a portion of your raise into a separate savings account to be used for vacations. Set aside a portion of your increased income to appreciate yourself. Even the most resolute savers should take a moment to acknowledge the achievement of being recognised at work. Just make sure what you choose is in line with your budget.
Enjoy your success but know that a raise is just another beginning. You’ve worked hard and earned your raise fair and square, but it isn’t a windfall. Make sure your money is working as hard as you are by putting a plan into action.