Received a Raise? Here Are 5 Ways To Make That Extra Income Work For You
Did you just get a raise at work? Congratulations! Getting a raise is a moment worth celebrating in your career, and you may wonder if there’s a “best” way to spend this money.
With a bit of careful planning, this extra income can help boost several aspects of your financial health. GOBankingRates spoke with Heather Winston, CFP and director of financial planning and advice at Principal Financial Group, to learn which money moves to make with your well-deserved raise.
Build Up Your Emergency Fund
Turn the milestone of getting a raise into a second milestone where you are able to start an emergency fund if you don’t already have one.
Winston recommends starting off with a small percentage from your raise. Put that percentage into an account that’s accessible and a liquid asset, such as a high-yield savings account.
Remember you can keep adding to your emergency fund over time. Your emergency fund should be able to cover six months of living without a paycheck and may be used to cover unexpected expenses that come your way.
Reassess Your Budget
“Think about both your short- and long-term financial goals, and how your monthly spending habits might inhibit you from reaching these objectives,” Winston said.
In reassessing your budget, start by paying any necessary expenses first. Then, determine what you want to do with the rest of the earnings.
Winston uses the example of increasing the amount you’re putting into a workplace retirement savings plan, like a 401(k).
“If your raise was 3%, consider increasing your 401(k) allocation by 1% and then deploy the other 2% toward other goals,” Winston said.
Pay Down Debt
Paying down debt might not sound like a fun way to celebrate getting a raise, but Winston said it’s important that any debt we carry is kept manageable.
“Many of us are hardwired to harbor guilt when we owe money. It doesn’t matter whether it’s to an individual, a mortgage loan or a credit card company,” Winston said. “The key is to figure out the right level of debt for you.”
Put a little bit of your raise toward existing debt, like credit cards, to help ensure it remains in check.
More than 53% of women are not actively investing, according to findings in a recent GOBankingRates survey. More than 1,000 U.S. women were polled in this survey and 33% cited a lack of money as the primary reason they haven’t started to invest.
After you build up your emergency fund and reassess your budget to determine how much extra money you have after paying off critical expenses, it’s time to look into investing strategies.
Winston said that even if you have an employer-sponsored retirement plan, consider opening an individual retirement account (IRA) to meet your needs.
“Investing enables you to grow that raise you received, over time,” Winston said.
Not sure where to begin in your investing journey? Talk to a financial professional to learn which investments are right for you based on your individual risk tolerance.
Consider a Splurge
Results from the 2021 Principal Super Saver survey reveal that even the best savers find ways to splurge. Nearly 80% polled say they balance long-term goals with short-term decisions by staying focused on watching their money.
Consider a splurge, especially if it’s something you’ve been thinking about like starting a home improvement project, planning to travel or investing in outdoor recreation equipment.
Be careful, however, that the splurge your raise goes toward doesn’t become part of lifestyle inflation. This is also known as lifestyle creep when you allow your lifestyle to become gradually more expensive as you earn more during your career. Some examples of lifestyle creep include trading in a modest car to lease a luxury vehicle or renting your own place instead of living with roommates.
It can be tempting to give in to lifestyle creep when you receive a raise, but be careful to avoid making this decision and save as much as you can. Remember to keep your focus on the balance between immediate financial needs and long-term goals.
“There is nothing wrong with treating yourself to something you’ve been eyeing for awhile, whether that’s a weekend trip, new handbag or a fancy dinner,” Winston said. “The key word here is balance.”
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