What Should You Do With Your Work Raises?
Although most of our raises fall below our expectations, we still expect and count on them. Raises are a little different than surprise windfalls like bonuses and tax refund checks in the sense that the money is spread out over a years worth of paychecks. This isn’t news to anybody, but the reaction to raise to windfalls is dramatic. Usually, with a windfall we unload on expensive items, where raises we too get excited but basically live the same way. With a little financial planning, you can milk the most of your raise, like your employer milks the most out of you!
One of the biggest benefits to raises is the ability it gives us to pay of debts. A raise in monthly income can easily be transferred over to recurring debt payments. Obviously, any debt with the highest rate should be targeted and pay down first, however, many do not think about paying down debts that have no benefit. For example, student loan interest can be written off, so many people hesitate to pay down extra money each month. But, you can only write off $2,500 of student loan interest a year. So if you are paying more than this in interest each year then there are no pros only cons for this debt, pay it off! Granted, there really is no good debt in relation to having no debt.
A good way to allocate your raise is to figure out exactly how much money is added to each paycheck and divide it up. One area that should be focused on is your savings. We harp on this all the time, but especially in our current financial climate your emergency fund should be a number one priority. Even if you only have a few dollars to stash away, do so and increase your amount with each raise and with each debt paid down you can increase your savings even more.
After paying down your high interest debts and allocating money into an emergency fund, consider adding to your retirement accounts. Whether this means increasing your work contributions limit, creating a separate tax-sheltered retirement account or saving for a down payment on a house (also considered an investment). Its too easy to take a raise and start eating out more often and “forgetting” your lunch at work, but you will not regret stashing away a constant flow of money into a interest bearing account.
If you use the set it and forget it method when dealing with your raises like you probably do for most of your bills, then you will get the most out of checks without being tempted to spend foolishly. Lastly, I think a raise is a reward for our hard work so putting a little more money into your entertainment fund is well warranted.
You generally get a raise because of your work ethic, responsible decision making, and your common sense shown in the workplace—why not show these same characteristics at home with your budget? $
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Comments
Good post! I’ve done this myself. I didn’t get a raise exactly (my company has a raise freeze currently) but I changed my deductions and am getting an extra $30+ per paycheck. Part of that is going toward debt repayment, the other towards other bills and savings.
I always believe you should not budget your raise for the next year and put into savings. Its free savings. Of course if you are in debt, put it towards that first.