5 Money Moves to Make When You Get a Raise

New year, new salary! According to the Economic Policy Institute, nearly seven million people are starting 2020 with a raise. The rise comes from a higher minimum wage across 22 states nationwide.

If you’re starting the year with a bigger paycheck — congrats! Before getting too late into the year, it’s smart to set yourself up for financial growth success throughout the year by taking a few simple steps. Here are a few ideas on what to do after getting a raise at work.

1. Reassess your finances

With new earnings come shifts in your overall financial picture. Not only is your gross income changing, but so will your take-home pay, available budget, and possibly your tax liability. 

To start, find out what’s your anticipate net pay. Payroll service, ADP, offers a helpful calculator for salary employees and a separate calculator for hourly workers. This amount will likely be different, and it might not be what you expect if your raise pushes you into a higher tax bracket. If you don’t know what your tax bracket is, you find your marginal tax rate on the IRS website.

Once you know how whether you’ll be taxed at a higher rate and what your anticipated net income is, review your standing debt and savings goals. Then, determine which financial goal you’d like to focus your raise on for the year. This may mean directing all of your extra income toward one goal, or attacking a few goals, simultaneously.

2. Revisit your emergency fund

One of your biggest defenses against debt and stressful financial situations is planning. If you didn’t reach your emergency savings goal last year, consider using some of all of your raise to accelerate this savings bucket. 

Your employer may have the option of directing a percentage or set dollar amount of your earnings into a dedicated savings account. If your company doesn’t let your direct deposit your paycheck into more than one deposit account, you can set up automatic deposits through your bank or credit union. This service is typically free and can help you get closer to your savings goal, without having to think about it each month.

3. Increase your retirement contribution

In addition to priming your current-self for success with a savings fund, paying your future-self is also an important step when your earnings grow. The more funds you can set aside earlier on for retirement, the more time your retirement savings has to work for you. If you already have an IRA, or 401(k) through your employer, revisit how much you’re currently contributing. If other areas of your finances can afford to do so, consider increasing your contribution by a percentage.

If you don’t already have a retirement account, ask your HR department about your company’s retirement benefits. You’ll want to specifically know whether you’re eligible for enrollment, the type(s) of retirement funds available, and whether the company matches employee contributions. 

If your company offers matching — for example, it contributes to your retirement fund up to a 5% match — you may want to adjust your contributions to at least meet the minimum 5%. This way, you’re not leaving free money on the table. 

4. Repay your debt

Debt, like credit cards and loans, charge interest over time. To avoid the heavy cost of borrowing, you can use your higher pay toward becoming debt-free. There are many strategies around debt repayment. The two most popular options are the Debt Snowball or the Debt Avalanche. 

The Debt Snowball tackles the smallest debt balance first, regardless of its interest rate. You’ll aggressively put any extra money toward paying this account off quickly, while only paying the minimum payment for other debt. Once the smallest debt is fully paid, you’ll apply the cash you once used for its payment toward the next smallest account and so on. This helps you mentally cross off debts and keep you motivated to stay on track.

From a financial perspective, the Debt Avalanche approach will save you the most money, long-term. It works similarly as the Debt Snowball in terms of focusing resources on one account at a time. The difference is that the Debt Avalanche focuses on paying off the account with the highest interest rate first so you avoid high interest charges.

When deciding on the best approach for you, think about which option will help you get to your debt-free goal most effectively. If you need ongoing boosts of encouragement by seeing progress with zero balances, the Debt Snowball might work best, for example.

5. Treat yourself

Last, but also important, on the list is celebrating your raise! Whether you’re getting a raise at work because of a minimum wage increase or a stellar 2019 performance review, let yourself recognize this moment of growth. 

Set aside some of your raise toward a spa day you’ve been putting off or an intimate dinner out with friends or your family. Regardless of how you choose to treat yourself, just make sure you give yourself time to save up for a big purchase and that it’s still within your budget.

Need help reworking your financial goals after getting a raise? Contact a financial coach for a complimentary call.