If you recently got a raise, you’re probably thrilled that your boss recognized your hard work. But, at the same time, your head may be spinning as you try to figure out what to do with the extra income. Before you go on a shopping spree, think about how much more money you will have—and the best way to spend it.
How Much Will Your Net Pay Change?
The increase in your annual salary is not the same as the increase in your take-home pay. Your raise could put you in a higher tax bracket. Wait until you get your first paycheck after the raise to find out exactly how much of a pay increase you’re getting so that you can decide how to use the money.
If you have credit card balances, particularly ones with high interest rates, pay them off as quickly as possible. If you have a student loan, car loan or mortgage, make higher monthly payments. Freeing yourself from the weight of debt can change your entire financial picture.
Save for Retirement
If you’re nearing retirement age and don’t have as much money saved as you would like, use your increased earnings to contribute more to your retirement account. A regular, modest increase can make a big difference if that extra money has years to accumulate interest. Your retirement fund will grow even faster if your employer matches your higher contributions.
Plan for Your Children’s Education
If you have kids who will attend college in the future, you can dedicate some of your pay raise to their education savings funds. Just be sure to take care of your own retirement first. You don’t want to be unable to work and have to ask your kids to support you when they’re still in school.
Save for the Unexpected
You never know when your car will break down, an appliance will need to be repaired, a family member will have a medical emergency, or you or your spouse will lose a job. Everyone should have an emergency fund with enough money to cover expenses for three to six months. If you don’t have that much set aside, start saving until you do.
Should You Change Your Living Situation?
If you’ve been putting off repairs to your home because of insufficient funds, now is a good time to tackle those projects. If you got a substantial raise and are thinking about buying a bigger house, ask yourself whether that is necessary and whether you can afford it. Don’t take on a larger mortgage if your current house suits the needs of you and your family. Instead, focus on other priorities. The last thing you want is to lose your job and have a house you can’t afford, no emergency fund, and insufficient retirement and college savings.
Getting a raise is exciting, but be sure to take all the variables into consideration before immediately deciding to upgrade your lifestyle. You’re better off playing it safe until you’ve considered all the options and how they’ll impact your lifestyle.