Financial Experts: 7 Things You’ll Regret Doing With a $10K Raise
Written by
Angela Mae
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Molly Sullivan
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When you get a significant raise, it can be tempting to splurge on something big — like a vacation, new computer or another big-ticket item. But while rewarding yourself for your hard work doesn’t hurt, it’s also smart to make a plan for that money rather than spend it all at once. This could be investing it in something that yields dividends, paying off debt or building an emergency fund.
Whatever the case, if you get a $10,000 raise, here are some things not to do with that money — lest you regret it later.
Spending All of It Immediately
One of the biggest regrets people have when receiving a large raise is that they spend it all instead of investing or saving it.
“I think that most people who receive a huge raise regret blowing it, which happens a lot of the time,” said David Bakke, financial expert at DollarSanity. “They could have seriously impacted their credit card debt, they could have gotten caught up on retirement savings, and they could have established an emergency fund (assuming none was in place), among other examples.”
Before you spend the extra money, think about what your long-term goals are. And if you want to use some of that money on things you want right now, try to keep the percentage used to a minimum.
Allowing Lifestyle Creep
Lifestyle creep is what happens when you start making more money and so you start spending more money. It can make it where you eventually need that extra $10,000 a year just to support your general expenses. Once you let lifestyle creep in, it can also be harder to go back and cut costs later.
“A common mistake people make is letting their spending increase commensurate with their new salary — that is, they succumb to lifestyle creep,” said Robert R. Johnson, PhD, CFA, CAIA, and professor of finance at Heider College of Business, Creighton University. “For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving the raise. What happens is they are unable to improve their financial condition because they spend everything they make.”
The good news is that there are potential solutions to this problem, one of which is to act like you don’t make more than you did before and to invest the extra amount.
“Continue to live the same lifestyle you led before receiving a raise and invest the difference,” Johnson said.
Skipping Out on Investing
When it comes to investing, you have a lot of options. You could contribute to a retirement plan, purchase index funds or buy alternative investments. Whatever the case, investing is a much better way to build long-term financial stability or wealth than spending your raise.
One way to get started is to put more money into a 401(k) plan, if you have one.
“One of the most important financial decisions anyone makes in their life is the decision to participate in an employer-sponsored retirement plan,” Johnson said. “Perhaps the worst financial mistake anyone can make is turning down free money. If one does not contribute enough in a 401(k) plan that has a company match to earn that match, one is basically turning down free money.”
Neglecting Your Savings
“Not saving more when income increases is another common regret,” said Erika Kullberg, an attorney, personal finance expert and founder of Erika.com. “People continue to save the same dollar amount, not percentage, and are saving less relative to their income.”
By not increasing your savings relative to your salary, you could be limiting yourself when it comes to bigger financial goals — like buying a house, paying off debts or even retiring early.
“One needs to develop the discipline to save and developing that habit early in life is extremely important,” Johnson added. “It is also important that people embrace investing and not simply saving. That is, the money you save needs to be invested in assets that will grow over time.”
If you’re not comfortable with the idea of investing just yet, it’s still better to put that extra $10,000 — minus taxes — into a high-yield savings account. That way, it can at least benefit from compound interest.
Ignoring Taxes
When you get a raise, it’s important to remember that your taxable income also increases. If you don’t account for this, you could end up with a higher tax bill than expected — especially if your employer doesn’t deduct taxes throughout the year.
“If your raise is big enough, it might very well push you into a higher tax bracket. This will have some financial consequences,” Bakke said. “You may owe a bigger bill come next April, and you’ll want to be prepared for that. In that scenario, I would suggest bumping up emergency fund contributions so you can take care of that larger IRS tax payment and avoid going into debt.”
Ignoring the Emergency Fund
An emergency fund is a separate savings account that’s meant to handle unexpected or unplanned expenses. This could be something like a medical bill or cutbacks at work wherein you lose your job or go from full time to part time. Whatever the case, if you don’t have an emergency fund and aren’t using your raise to create one, you could regret it.
“Your first order of business is to make sure your living expenses are covered if something unexpected happens,” Kullberg said. “This is especially important because recent research suggests that 60 percent of Americans would have trouble coming up with $1,000 in the event of a financial emergency, such as a health emergency or a layoff. You should have a solid emergency fund — typically 3-6 months’ worth of living expenses.”
Accumulating or Keeping Debt
Something else you’re likely to regret is either accumulating more debt or not paying off the debts you already have. Whether you have credit cards, auto loans or student loans, it’s generally wise to start chipping away at them — especially if they have high interest rates.
“If you get a big raise, you obviously deserve it and therefore want to do a little celebrating,” Bakke sai. “My advice would be to adopt the following equation — use 25% for wants (new TV, new smartphone, nice vacation), and use the other 75% for your long-term financial goals, whatever they might be.”
Plus, paying down debt can improve your credit score and cut down on how much interest you’re paying over time. This can then free up more cash for other financial needs and goals.
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