5 money moves to make when you get a raise

Now more than ever, companies are stepping up their raise game to keep their employees happy (and employed). 

In June of 2022, the average annual salary bump peaked at 4.8%—the highest increase in decades. And while most people would be thrilled with such a generous swell in their pay, it helps to put things in perspective by looking at your purchasing power, which tells you how far your money can go.

With inflation surging to all-new highs, Americans have been left reeling with the increasing costs of everyday items.  

For employers, it's just good business: paying employees more has been shown to improve morale and boost productivity, saving them a lot of time and money in the long run.

If you are one of the lucky ones to receive a pay bump, congrats! You've been rewarded for a job well done. But don't go celebrating yet… there are some things to consider beforehand.

5 things to do when you get a raise

1. Figure out your take home pay

Before you go out and buy that new pair of headphones you've been eyeing, first consider what you will actually be taking home. 

For example, say you get an extra $5,000 added to your annual salary. If you're like most people, you'll quickly calculate what that number is monthly. Once you arrive at that number, you think, "$416 extra a month! That'll cover my gym membership, internet, and cell phone bill!"  

Not so fast. You skipped a few steps in the process. First, make sure you take out any taxes and other deductions like 401k contributions from your check. After you find out that number, you can then decide what to do with your excess pay.

2. Pay yourself first

This is a great time to revisit your goals and refocus on what matters.

Whether you’re adding some extra padding to your emergency fund or stepping up your 401k contributions, socking away a few extra dollars for unexpected expenses or retirement is never a bad move.

Here are a few strategies to consider putting into action with your additional wages:

• Max out your 401(k) contributions for the tax break and added retirement savings. Just make sure you consider plan fees, investment options, and liquidity needs first.
• Fund a taxable brokerage account with after-tax dollars for greater liquidity and flexibility than taxable accounts. First consider dividends, capital gains, how to manage losses (and avoid wash sales), and how to use tax-efficient investments (such as exchange traded funds).
• Contribute to your health savings account (HSA). An HSA is one of the most powerful retirement security accounts available because they have three tax advantages:
  • You don’t pay taxes on your contributions.
  • You don’t pay taxes on any growth.
  • You don’t pay taxes when you use the money (if used for qualified expenses).

3. Pay off existing debt

Considering the average American has some form of debt, one of the best things you can do with your extra dollars is to pay down some of what you owe. 

Here are some of the most common types of debt you can consider clearing from your conscience:

• Student loans
• Auto loans
• Credit cards
• Medical debt
• Personal loans

When you pay down debt, you are putting money back in your pocket by eliminating those pesky interest charges that slowly build up over time. If you’re curious about where to begin, consider starting with the accounts with the highest interest rates.

Aside from the mental ease you’ll experience—along with some extra dollars in your pocket—your credit score is also likely to improve as you lower your overall exposure to debt. 

4. Avoid lifestyle creep

Most people tend to spend more as they make more, which is fine as long as their new expenditures are made intentionally. However, things can become troublesome when spending becomes mindless—i.e., when 'wants' overrule 'needs.' 

The reason is that your savings suffer when you spend without purpose. As a result, money otherwise earmarked for an emergency fund or retirement account gets gobbled up by luxury items and other nonessentials.

If any of this sounds familiar, you’ve likely experienced the phenomenon known as "lifestyle creep." But don't worry; it happens to the best of us. The key is to recognize when it is happening and take the proper steps to pivot your money in the right direction.

To avoid spending on things you don't need in the future, consider asking yourself the following questions:

• Was there a particular emotion tied to my purchase?
• Did it make me happier, or did the feeling of happiness quickly fade away?
• Was it driven by envy to keep pace with another?
• Were you unable to pay for a necessity after purchasing something you wanted (but didn't need)?
• Did you take out a loan or arrange a financing agreement to acquire this item?
• Did you consider how this purchase fits into your overall plan?

To be clear, spending more isn’t always bad, as long as it is balanced with other healthy financial decisions (like the ones mentioned in this article) that will help you achieve your goals.

5. Invest in yourself

The life you want to live is driven by your core values and beliefs. Consider taking stock of what matters to you most, then invest in your personal and professional growth. 

Money is a tool to put you in control of the life you want. When you invest in yourself, you’re not only putting money into something that will improve your life, but you’re also putting in time and energy.  So with this in mind, choose something to which you will dedicate yourself fully.  

Here are some ideas to get the wheels turning:

• Build a side hustle.
• Learn new skills, take new classes, or pursue a new professional designation.
• Invest in your health and wellness (join a gym, meditation, or yoga class). 
• Make time for travel and new experiences.

Final word

The best way to prepare for your next raise is to have a proactive plan in place—so when that day comes—you are ready to act with confidence and navigate that next chapter with a sense of calm.

Getting a raise is an exciting time and a testament to your hard work. There are several moves you can make after receiving a pay bump, but it’s important to first figure out what your take home pay will be. From there, you can decide how to allocate what’s left.

But what happens when you don’t know what move is right for you, how much to save or spend, or how much you will have to pay in taxes?   

The answer is simple: Get in touch with a CFP® professional from Facet today.