What Should You Do With Your Money When You Get a Raise?
A combination of factors — including inflation at 7.9%, a tight labor market and the Great Resignation/Great Reshuffle giving employees more leverage in negotiations — is pushing more Americans to ask for a raise. In addition, the number of quits increased in February with 4.4 million workers voluntarily leaving their jobs, according to the Labor Department, adding further proof of employees’ dissatisfaction.
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Against this backdrop, a Laurel Road survey found that a majority of women — 54% overall and 59% of BIPOC women — are looking to make up for lost ground during the pandemic, saying they think they will ask for a raise in 2022.
However, while pay increases are common overall, they are being outpaced by inflation. Pay is a major reason why — 79% of employed job seekers believe that they can make more money by switching jobs than staying put in the current market, according to a Joblist US Jobs Market report.
However, the report notes that of the 53% of workers who received a pay raise in 2020, 58% reported that their raise was 5% or less, failing to keep pace with the 6.8% inflation rate reported in November 2021.
With this in mind, experts caution to be very mindful of where to put that extra money, whether it’s planning for retirement, paying off debt or saving for a rainy day.
Erica Seppala, financial analyst at MerchantMaverick.com, tells GOBankingRates that if you receive a raise in your salary, the way you should spend (or not spend) these extra funds really depends on a number of factors. She says to first consider your current financial situation. Are you drowning in debt? Are you struggling to pay your rent, mortgage, or other bills?
“This isn’t uncommon – layoffs, closures, days taken off due to illness, and other scenarios have put a heavy burden on households around the world. Do an honest analysis of your current situation before you decide how to spend your money, if you choose to spend it at all,” she said.
The next step is to look to the future. She recommends starting small by looking around the current state of your city or state, as inflation is hitting everyone hard, but in some areas, it’s worse than others.
“If your current paycheck is stretched to the max to pay your ordinary expenses (everything from bills to groceries to gas), there may be a need in the near future to use extra funds to cover your living expenses,” she said.
You can also look further into the future, she adds. For example, if your older car has seen better days, now is the time to determine if you want to use extra funds for maintenance and repairs, or if it’s a lost cause and you need a new vehicle.
“If the latter is true, I wouldn’t advise running out to purchase a new (or used) vehicle immediately, due to the current state of the automotive market. Now is the perfect time to start putting back extra money toward a larger down payment – which means a smaller loan and lower monthly payments in the future,” she said.
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Finally, thinking about and planning your retirement is always a good move. Seppala suggests checking with your employer first to see if they offer a 401(k) matching program, which can help you get the most bang for your buck. If it’s financially feasible, take advantage of the full employer contribution to maximize your retirement account.
“And perhaps most importantly, don’t rush into any decision. Take the time to understand your financial needs – both current and in the future,” she adds. “Unless there is an expense that is absolutely necessary at the moment, put any extra money away and do a thorough analysis of your present financial situation, while also taking into account what you want for the future, before spending your extra funds.”
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