If you’ve just received a raise, congratulations! Getting a well-deserved pay increase is an exciting feeling. It can also be a great opportunity to reassess your financial strategy.
In some cases, a raise can lead to lifestyle creep over time. This is when “extra” money goes towards luxuries which you start to perceive as necessities over time. While it’s okay to want to reward yourself for your hard work, the end result of lifestyle creep can often be that your new income isn’t actually helping you reach your financial goals. Taking the time to evaluate your financial life after a raise can help you prevent this and stay on track.
The Value of a Financial Advisor
Money management is always going to be personal for each individual/household. Given this, it’s essential to understand your unique situation and to consider what your priorities are.
Meeting with a financial advisor at this stage can help simplify the process, taking your specific goals and circumstances into account. You’ll receive valuable, personalized input about how to manage and invest your money. Your advisor will create a tailored plan to help you determine how you can best use your pay increase.
Options To Consider
Ultimately, your financial life is unique to you, and meeting with an advisor can help you pinpoint what next steps are best for you after a raise. The options below can help provide a starting point for you to consider, although some will likely apply more than others.
Tips for managing your money after a raise include:
1. Pay Down Debts
Interest charges from debt can add up quickly. If you have high-interest-rate debt, such as credit cards, consider using your raise to start paying this down more aggressively. Prioritizing debts with the highest interest rate saves you more money in the long term (avalanche method), but it can also be beneficial to pay smaller debts first to build momentum (snowball method).
2. Establish Or Grow Your Emergency Savings
Having money saved for emergencies is crucial, but you’re not alone if you haven’t built these savings yet. According to Bankrate, 22% of American adults had no emergency savings in 2023, and an additional 30% didn’t have enough to cover three months of expenses. If you’re in either of these categories, a raise presents an opportunity to start saving more each paycheck until you have built a healthy emergency savings account.
3. Invest Toward Long-Term Goals
An increase in pay can help you grow your retirement fund or other investments. If you aren’t currently contributing to an employer 401(k) plan, or if you aren’t maximizing your match, now is a good time to do so. You can also consider an individual retirement account (IRA).
In addition to retirement savings, you can also consider starting or contributing to a brokerage account. By investing your money, you are setting a strong foundation for your financial future.
4. Revisit Your Budget
Take a look at your budget and consider where your money is going each month. Depending on your financial situation before and after your raise, there may be some adjustments you can make. One example is if you weren’t comfortable putting bills on autopay before, but now have an extra cushion to do so.
Looking at your budget also gives you the opportunity to differentiate between necessities and luxuries. As you set a new budget to reflect your higher income, you should keep this in mind. This brings us to our last tip…
5. Reward Yourself Responsibly
Finally, once you’ve made a plan for managing your money after your raise, it’s okay to add some luxuries to your budget or to make a larger one-time purchase. As long as this is balanced with savings goals and fits within your overall budget, it’s okay to reward yourself for your hard work. You deserve to celebrate, and you can feel even more comfortable doing so knowing that you’ve managed your money wisely.
Meet With A Wellspring Advisor
If you’ve just received a pay increase or are interested in financial planning for any other reason, Wellspring is here to help. Our goal is to make the financial industry work for you and to give you the information and tools you need to manage and grow your money.
To learn more or set up an appointment with a financial advisor, contact us today.
Wellspring Financial Partners, LLC does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
