Getting a Cost of Living Raise? Here’s How To Best Manage the Extra Money
Written by
Martin Dasko
Edited by
Amber Barkley
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Some employers have announced that they will give their employees a cost of living raise to help offset increased expenses. If you’ve been struggling financially or are looking to become more proactive with your finances, this could be the ideal time to make some changes to improve your situation.
How can you best manage any extra money that you have coming in due to a raise?
Analyze Your Expenses
The first step should be to determine your current financial situation. This is the perfect time to review your expenses and income to understand better what’s happening with your money.
What can you do here?
- List any debts you have. Write down all of the money you owe and the interest rates.
- Look at your income. Review your income to see if it’s where you want it to be and how it compares to your expenses.
- Review all of your expenses. Go through your fixed and variable expenses to see if any obvious changes could be made.
- Determine how the extra money will help. Think about how the additional funds would work for your best. Read on for some viable options.
Pay Down Your Debt
With everything getting more expensive over the last few years, many people have had to rely on credit cards to get by. You could use this extra income to reduce your debt and finally become debt-free.
Here’s how you can approach this:
- Decide which debt payoff strategy you want to use. You could pay off the debt with the highest interest first or focus on paying off your smallest balance for a quick win.
- Make all of your minimum payments. You should always be making the minimum payments on time to avoid additional fees.
- Make extra payments on your debt. Once you’ve decided which balance you want to pay off, you should make extra payments to speed up the process.
The sooner you become debt-free, the sooner you can get aggressive with planning for your future.
Beef Up Your Emergency Fund
If you’ve depleted your emergency savings or haven’t had the chance to build them up yet, you could use the extra money to address this. That raise could be used to build financial security so that you don’t have to stress about handling unexpected expenses in the future.
How much should you save?
- Setting aside three to six months’ worth of living expenses in an account is generally recommended. If you can, you’ll want to have enough money to cover your expenses for at least a few months, since there’s no telling what the future has in store.
- Do your best. You won’t always be able to save significant money, because life is getting more expensive. The goal should be to save as much as you can.
Invest In Your Future
“Are you putting enough toward retirement?” asked Todd Stearn, founder and CEO of The Money Manual. “You can find retirement calculators online that can quickly and easily help you figure out whether you are or not. If you find you’re not where you should be, consider using your raise to increase your contribution.”
With more money coming in, you can set aside some funds for retirement. You could look into any retirement plans offered through your employer, or you can set up your own accounts.
Here are a few other ways you can invest in your future:
- Spend the money on upgrading your education. You can use the funds to update your skills to apply for jobs on a higher pay scale.
- Pay for mentoring or professional consulting. You can use this raise as an opportunity to work with a professional to see what steps you could take to improve your overall financial situation.
Take a Vacation
“If you didn’t think you could afford a vacation before, maybe now you can,” Stearn said. “Everyone needs and deserves a break when they’ve been working hard, and the benefits have been proven. If your vacation budget looked a little too sad to get you anywhere this year, consider letting your raise help you get where you want to go.”
These extra funds could help you reward yourself with a trip to create memories with your family. While most financial experts often urge you to make decisions based on logic, sometimes you have to do what’s best for you. That weekend getaway or a family vacation to a warm destination could help you return more motivated and relaxed.
Deciding How To Spend Your Raise
This raise may be enough for some people to focus on their financial freedom. For others, it may just help them get by during difficult times. There’s rarely a one-size-fits-all solution for personal finance, because everyone is in a different position. This is why it’s crucial that you review your finances regularly to see where changes could be made.
More From GOBankingRates
