What to do when you get a RAISE! (6 ideas)
With record inflation this year coupled with the great resignation, many workers have been blessed to receive more significant pay raises and increases this season. If that's you, you'll definitely want to keep reading.
A recent CNBC article reported that U.S. companies expect to pay employees about 3.4% more in wages this year, so we are an exciting season and time of life. We want to make sure that we are making the best decisions with that extra money. So what do we do with the extra dough? Let's talk about it.
More of the video type? Check out the corresponding YouTube video above!
When we ask, "what's the best thing we can do with our pay raise?" what we're really asking is, "what is the best way that I can use these funds?" Should I put it towards debt? Should I put it towards my sinking fund?
If you don't know the answer, I highly recommend taking our quiz (the word "quiz" is hyperlinked, btw!). That'll hopefully help you make a decision. Also, if you want to dive super deep with us - maybe you don't even know where to start when it comes to your money and need the help of a money mentor - let me be your money mentor! Check out MONEY 180™, our signature program where I hold your hand, and we tackle all these money things.
Before discussing the right thing to do with your money, one thing we want to caution against is lifestyle creep. Maybe you've heard of this term before, where every time we make more money, we magically find a new way to spend more money. We're not saying you shouldn't spend any of it; we'll get into that. However, we want to avoid lifestyle creep at all costs. If you don't have a plan for extra money, it will easily find a way out of your hand.
The goal here is to be intentional when it comes to our money. If you intentionally spend it, that's one thing, but we don't just want it to fly away because you didn't create a plan for it.
Here are six everyday things/ideas/suggestions that you might consider doing when you have a raise or an increase in what you are bringing home:
Build your emergency fund
I'm sure you knew we were going to say that if you've been following us for a while. An increase in earnings is the perfect time for you to stop and think. Does the size of your emergency fund match what you need? You're making more money and may or may not decide to add on a bill. However, with increased bills comes the need for an increased emergency fund. You may choose to put aside that money for a year or so that you're able to weather the potential storm of losing your income. Emergency funds are not the sexiest of goals; it's not the flashy, exciting thing that all the kids are trying to do these days. However, it is a fundamental piece of everyone's financial health and picture, and it is an excellent fallback. Life happens, so building up or topping up your emergency fund is a great way to use any additional money.
Fund some of your sinking funds
Sinking funds are money that you save with the intention of spending. This concept differs from an emergency fund where the purpose is truly saving. Your sinking funds are there to put money aside to spend it eventually.
For example, you can use a sinking fund to put money aside to pay a bill that only comes once a year. You might use one to save for Christmas presents or put down the money you're saving for a down payment on a house. The point is that, eventually, you will spend that money. Put a little bit of money aside to fund your goals proactively. You might choose to use any increases in your income to help support those items.
Sinking funds are a strategy that we use personally. For example, Meshack's health insurance has a $1,500 deductible. If and when he needs medical services, we'll need to have that money ready, so why not put it down over time? That way, we don't have to worry about where the money will come from because it's already there.
Pay down debt
Ah, debt. It's something that we don't necessarily love dealing with, but something many of us must think about. If you have some newfound funds and are living off of your previous income and making things work, you might reassess the amount of money you allocate to debt paydown. It might be a great use of funds to take that extra cash from your raise and put it towards your debt, whether that be a car loan, student loans, or medical bills. Whatever type of debt you have, it might profit you to accelerate further debt repayment instead of stretching out your timeline and paying more interest over time.
We're not saying you have to use every penny to pay off debt. We're not those people. However, if paying down debt is something that is the highest and best use for you and your current financial situation, then definitely go for it,
Increase your investment/retirement plan contributions
If your debt is manageable or you're debt-free, for example, and your highest and best use is putting more money into the markets, definitely take this time to increase those contributions. The more you get used to having that money in your hand, the less likely it'll be that you'll want to put it away, especially for something long-term like retirement or long-term investing. It's something you want to do from the start. Automations are your friend in situations like this. Use it to your advantage. Future you will thank you.
Increasing my retirement plan contributions is something that I did the other day. I recently got a raise and used some of that money to increase my retirement contributions for the first time since I've started working full-time (4.5 years ago!) I decided to do this since we're really close to achieving our dept paydown goals; now, the highest and best use for us is switching more from debt repayment to putting more money into the markets and other priorities.
Increase your giving
We contribute 10% of our gross income towards tithing as part of our religious belief system. However, for you, giving might look different. Maybe you want to give more to a charity or cause that matters to you. You might want to give more to family and friends. If you are at a point where your finances are healthy, and you're on a good trajectory, that's when we can start pouring from a fuller cup.
Sidebar: we believe giving money to charity should never be a tax-motivated activity. It should be driven by your morals and values and come from the heart. If increasing your giving is your conviction and desire, you can consider doing that with your raise.
Do something FUN!
Personal finance should not be this boring, restrictive thing. You don't have to put every single spare penny into the markets. I'm sure you've seen the internet memes and shame posts talking about "well if you had just put this five dollars into the s&p 500 instead of going out to lunch" or whatever ridiculous phrase. Sometimes, the highest and best use means taking care of yourself. We have one earthly life to live, so we must make room to enjoy it. Yes, of course, be smart with your money. Put most of it toward your financial goals. However, reserve some of that for yourself, too.
This isn't to say that we should fall victim to lifestyle creep by adding another bill. However, you might consider doing a one-time splurge or purchase like a vacation or something that wouldn't become an ongoing obligation if there was an emergency. We think that there's a more holistic and well-rounded approach to money and life, and you want to make sure that you are getting the most out of it.
This "treat" will vary person to person because this is personal finance, after all. The most important thing is to ensure that we're all meeting the money milestones and goals that we have set for our finance journey.
Want to get started on your personal finance journey with me as your money mentor? Check out our program, MONEY 180™.