Avoid These 8 Money Mistakes When You Get a Raise

Few things bring more joy than getting a pay raise, especially if you are struggling financially. As 63% of Americans live paycheck to paycheck, according to a November 2022 report from LendingClub, getting a raise is often seen as the answer to a better life.

With a raise, you may think about dining out more often, going on more vacations, buying all the latest gadgets and even moving into a bigger home. But unless you have financial discipline, a raise can actually dig you into a deeper hole than you could imagine, as ironic as that might sound.

Here are eight tips on how to avoid common mistakes people make after getting a raise.

Lifestyle creep is the tendency to spend more when you earn more. Whether you earn $2,000 per month or $10,000, it’s just human nature to end up spending all of that money every month. In fact, if your salary somehow jumps from $2,000 to $10,000 per month, it might not even take that long for your spending to accelerate to the point that you think you don’t earn enough money to make ends meet.

It is this instinct, perhaps more than any other, that you need to fight after you get a raise. Through a combination of wanting a better life and/or talking yourself into things that “you deserve to own,” it’s easy to end up spending as much as you make, or even more, no matter how high your income grows.

This is why, as astonishing as it sounds, U.S. adults with a net worth of $100,000 or more are the ones most likely to carry credit card debt, according to a 2019 study by Bankrate Credit Cards. Similarly, a November 2022 report by LendingClub found that 47% of Americans earning at least $100,000 were living paycheck to paycheck.

If you get a raise, you don’t want to end up in either of these categories.

One of the first priorities you should have when receiving a raise is to boost your retirement savings. Although it can be hard to pass up immediate gratification in exchange for a reward you might not see for 30 or more years, you’ll definitely thank yourself for the effort once you retire.

Right after you get a raise is the easiest time to increase your retirement savings, as in one sense it amounts to “found money” — you weren’t living on that additional money to begin with, so why not tuck it away and earn a return on it? You’ll also get tax advantages along the way, from a potential tax deduction on your contributions to tax-deferred growth on your investments. If your employer matches a portion of your contribution, that’s another source of “found money” that will boost your retirement nest egg.

Paying down debt should be among your top priorities after getting a raise. Debt is not only a drain on your current cash flow, it’s a growing cancer that can double in size in just a few years.

Use as much of your raise as possible to aggressively pay down debt so that you can then start earning a return on your money rather than flushing it down the drain to cover interest costs.

From a financial perspective, it’s just human nature to project recent events into the future. If you got a 10% raise this year, it’s easy to expect getting 10% raises every year. While that would be a great scenario for your finances, it can cause problems if you immediately build that assumption into your retirement projections.

If you instead only receive 5% raises annually — or perhaps even none at all — you’ll end up far short of where you think you might be when you retire. Keep your retirement projections conservative, and resist the urge to project future similar gains to your salary.

One thing that often gets overlooked after someone gets a raise is that their emergency fund could use a boost. You’ve likely heard the oft-quoted axiom that you should keep three to six months’ worth of money in your emergency fund, and perhaps even more.

Well, if your salary jumps from $50,000 to $60,000 per year, three to six months’ worth of savings jumps from a range of $15,000 to $30,000 to $18,000 to $36,000. In this scenario, you’d want to get an additional $3,000 to $6,000 into your emergency fund as soon as possible.

Updating your budget is one of the first things you should do after getting a raise. The quickest way to blow money is to have no home for it, so rework your budget as soon as possible to reflect your new financial reality.

This is particularly true if you now earn enough to cover your expenses and have money left over. Without a line item for where that money should go — such as your retirement savings, emergency fund or other savings goal — it’s far too easy to simply spend it.

One of the downsides of getting a raise is that you will soon owe more taxes as well. A big enough raise might push you into a whole new tax bracket, so check your withholding carefully.

After enjoying a year of your new, higher salary, the last thing you want to end up with is a fat tax bill because you underpaid your taxes throughout the year. Talk with your HR department and/or tax advisor about adjusting your withholding to the correct level any time your income changes.

Just because you shouldn’t blow your whole raise doesn’t mean you shouldn’t use any of it. In fact, if it’s used for investing or other productive purposes, it can pay massive dividends over the course of your life.

If you own a home, for example, taking some of your raise to catch up on overdue maintenance or improvements may not only improve your quality of life, but also the value of the house itself. Similarly, taking some of your raise to take some classes and learn new skills can also pay you back multiple times over during the course of your working career.

Remember, money you use for consumption — like buying shiny new toys — is pretty much gone once you spend it, but money you invest can come back to you many times over.