Congratulations — you just scored that elusive raise! After the elation settles down, it’s time to start thinking about what to do with that extra income. Although indulgent vacations or a new set of wheels might be tempting (and perhaps well deserved), there may be some other, smarter things to consider before you start spending haphazardly. For example, there are some smart decisions you can make with your money today that will last you for years to come. Wouldn’t that really make all the extra work you put into getting that raise worth it?
Here are some things to consider doing with extra money from a raise that will help you reap even more rewards. (As a side note, before making any changes to your budget it’s a good idea to wait until you receive your first paycheck after getting the raise so you can really assess how much discretionary income will be added to your current pay. After all, you’ll need to account for any additional taxes that will be taken out, so you won’t really know what your raise amounts to until you get that first paycheck.)
Option 1: Increase your retirement savings
One of the smartest moves you can make with your extra money is to put some of it towards your retirement accounts. If you’re already maxing out your corporate 401(k), consider looking into whether or not you qualify for an additional account, like a Roth or Traditional IRA. Due to the magic of compound interest, any money you put into these accounts now will grow exponentially over the years until you use it for retirement, which makes your raise even more valuable.
Option 2: Pay down debt
If you’re working on paying down any type of debt, throwing additional money from a raise toward that goal is a solid idea. Paying down debt more quickly has multiple benefits. It’ll free up some discretionary income for you in the future, you’ll be working toward growing your overall net worth and you’ll be helping out your credit score by lowering your debt-to-income ratio. Once you realize how much extra income you’ll have in each paycheck, sit down and map out how much money you would need to put towards your debt each month to pay it off within your goal timeframe. Working with a solid timeline — and watching your debt decrease, even if only by a little bit each month — will help you maintain your efforts toward the goal. (Need a little more help on paying down debt? Check out this guide for a more in-depth look at how to do so.)
Option 3: Pad your emergency savings
Experts recommend saving up at least 3-6 months’ worth of expenses in a savings account that is strictly marked for emergencies. This can be very hard to do when you’re trying to pay down debt, save for retirement and even occasionally have a little fun every now and then — but that’s where a raise can come in handy. If you can make a goal now to put away a certain amount for a certain amount of time, then you’ll know that after that time comes, you’ll have that money freed up again to spend on other things (like perhaps some of the other suggestions on this list?). Still not convinced about the necessity of an emergency fund? Read this piece about real stories of how an emergency fund saved the day to change your mind.
Option 4: Pad your insurance
If your debts are paid, your retirement is accounted for and you’ve got a solid emergency fund going, then you might consider looking into any additional insurance plans that could make your life (and your family’s) a little easier down the road. For example, if you’re married with kids, do you have a life insurance plan? How about short-term disability? Do you have enough renters or homeowners insurance in place should something happen to your home? If you’re lacking in any of these areas, it’s worth checking into how much extra a month it would cost to put a solid plan in place. While we’re on the topic, if you have a family, you might want to check out this piece about some of the other things you should have in place when you have kids.
Option 5: Start a ‘gift’ fund
It might seem silly or frivolous, but if you were to open a brand new savings account entitled ‘gifts’ and put a certain amount of money into it each month, imagine how much easier your life would be come Christmas, and all during the year when you have to shell out for birthdays, anniversaries, baby showers, weddings and the like? Start by taking stock of how much you spent last year on Christmas (try including money for any travel-related expenses as well), and pad it by a couple hundred for additional gifts you’ll most likely need to buy throughout the year. Then divide that number by 12 and start trying to save that much each month into this special account. This will make life so much nicer when you don’t have to eat ramen noodles every night during a month when you have three baby showers, two birthdays and a wedding to attend.
Option 6: Have some fun
A raise is reward for hard work, and that means you should be able to take advantage of some of that money by putting it towards things that give you satisfaction right now. Of course the size of your raise will determine how much you can actually indulge, but whether that’s starting a travel fund, finally buying that new bedroom set you’ve had your eye on or indulging in one seriously fun night on the town or weekend away with friends, you shouldn’t feel bad about allowing yourself to celebrate your successes, even if it’s just for a temporary amount of time.