You’ve worked hard, taken on extra responsibilities, and made sure to shine at every aspect of your job. It’s finally paid off and your boss let you know that you’ve been approved for the raise you’ve wanted for months. Your first instinct may be to start dreaming of all the things you can do with your money, but don’t rush out and sign a lease on a brand new car just yet. Naturally you want to enjoy your extra money, but you also don’t want to spend it so fast you hardly notice you ever got a raise. Instead do these things.
Review your tax withholding. Your raise might push you into a new bracket. Use the IRS’s online withholding calculator to see how much should be withheld from your paycheck based on your salary and exemptions. If you need to make changes, complete a new Form W-4 and give it to the right person in payroll or human resources. Otherwise, if you don’t adjust your withholding, you could end up with a tax bill when you file next year’s income tax return.
Don’t count your eggs just yet. A 5% raise might not really look like 5% on your paycheck, especially if you’ve had to adjust your tax withholding. Wait until you get your first paycheck so you can see how your pay really increased post-raise. Once you have a concrete idea of how your raise affects your take-home pay, then it’s safe to start making plans for your money.
Be careful about taking on extra expenses. A few extra hundred dollars in your paychecks makes you feel like you can say yes to anything. Premium cable channels? Go right ahead. Spa subscription? Why not? Another extracurricular for the kids? It will keep them busy. Watch out for lifestyle inflation, which can easily happen as you make more money. If you start taking on new expenses quickly, the extra money from your raise will be gone before you ever really get a chance to just enjoy having more money in your paycheck.
Increase your savings. Rather than spending your salary increase on more “things,” your raise will benefit you much more if you divert it to savings. If you’re comfortably living on your current salary, you won’t miss the extra money if you put it in your savings account. You can build up your emergency fund, maximize your retirement savings, or put money towards a summer vacation. You don’t have to put all the salary increase in your savings – you can split it 50-50 with another goal.
Use the extra money to pay off your debt. Move beyond minimum payments by putting some extra money towards your debt payments. Start by paying as much as you can towards your highest rate credit card and continue until all your cards are paid off. If you don’t have any credit card debt, consider putting extra payments toward your mortgage or car loan to pay these off ahead of time. Make sure you won’t face any prepayment penalties by paying before the scheduled date.
It may be awhile before you get another raise so maintain some financial freedom by avoiding too many new financial obligations.