Receiving a raise, whether it’s expected or a genuine surprise, is a huge achievement. As a reflection of your hard work and dedication, it should be celebrated, but before you spend the sum of your new raise, there are a few financial steps to take first. Below we have listed a few places to get you started and bring you that much closer to celebrating your big win!
Review Your Monthly Budget and Adjust
With a new salary, comes new monthly income and a need to adjust your current budget. Before adding the extra cash into your expendable income, consider dividing it carefully into your fixed, variable, and emergency expenses. In other words, cover your needs before your wants. Doing so can help to pay off things like a mortgage or car payment and ease financial burdens surrounding other monthly payments such as bills and rent.
Building an emergency fund is a top financial priority as well, so contribute enough to gradually save at least three to six months worth of your monthly expenses. The more prepared you are for the costly unexpected, the less your wallet will suffer and the less financial stress you’ll experience in the event of an emergency. Once this money is placed in a savings account, resist the temptation to withdraw for smaller, less costly events. Your emergency fund should be used for more expensive necessities only, like for example, medical care.
Pay Off Outstanding Debt
If you are feeling the financial weight of debt, or you just can’t seem to dig yourself out of the debt you continue to incur, an increased salary is an opportunity to pay toward the money you owe. Referring to the updated budget you created, analyze what you owe on a monthly basis, prioritizing each item by timeliness and amount due. Set aside a portion of your new pay check to divide up amongst the payments, contributing the most to the higher priority payments and so on. Be sure to pay more than the minimum balance each pay period to shorten your debt payoff timeline.
40% of millennial income goes toward discretionary costs or “wants,” which ultimately is causing 20% of their debt to stem from their credit cards. Avoid unnecessary spending on your credit cards and try your best to trade old spending habits for more sustainable ones. Apply this to your overall debt management plan that takes not only your new salary into account but your current lifestyle and upcoming milestones as well.
Plan Ahead for Life’s Milestones
A pay raise can help to tackle life’s milestones with more stability. Assess what chapter of life you are currently in and what milestones it may bring. Are you getting married in the near future and buying a home, starting your own business or making a career change, or are you close to retirement? Creating a timeline that encompasses your personal, professional, and financial goals helps to visualize, and more importantly, prepare for your future. It also determines the type of monetary support you have access to based on things like your income and credit score to alleviate some of the stress associated with more costly ventures.
If you plan to start a family and buy a home for example, beginning the mortgage preapproval process ahead of time can get a bulk of the mortgage process done upfront and make your chances of finding a home that much stronger. Or, if you plan on retiring by a certain age, setting aside a portion of your paycheck to a 401(k) program sooner rather than later can ensure that you can live comfortably when the time comes.
Increase 401(k) and Retirement Contributions
Speaking of planning ahead, now that you are receiving a higher annual salary, it may be time to review your 401(k) and retirement contributions. A 401(k) has a multitude of saving benefits, including annual pretax contributions. A 401(k) also has the added benefit of building retirement savings at a fast rate with a company match. The standard company match equates to 50% of up to the first 6% you contribute. This adds up quickly and is an easy way to build a savings account that is out of sight out of mind.
Be sure to talk to your employer about their retirement and 401(k) benefits to get a better understanding of how much to contribute based on your new salary. It is important to always update your contribution when your income increases, because the more you can save now, the better off you will be when it’s time to retire.
A pay raise is a huge testament to your hard work, so keep going! Keep seeking new opportunities for growth to advance career goals. A pay raise should be motivation to keep striving for further success, so talk to your manager about upcoming opportunities and share your ideas! This is a great step toward not only professional development, but also personal development and financial success. We hope these financial tips help you to delegate your new raise, take you four steps closer to achieving your financial goals, and make celebrating even more worth i