If you've just received a pay raise at work, you are likely elated and excited about having more money coming in. You may be wondering what you're going to do with this extra cash. If this is the case, consider the points below.
Take a Fresh Look at Your Budget
When you first get your raise, take a look at your old budget and determine what tweaks you want to make. If you don't have a budget, it's a good time to implement one. Try to avoid lifestyle inflation. In other words, just because you're making more money, it doesn't mean you have to spend more lavishly on a regular basis. In fact, if you can maintain your current lifestyle, you'll be able to get more out of your increased income for the future. Review your spending categories (such as bills, groceries, transportation, entertainment, and hobbies), and reevaluate your financial goals.
Take Care of Debt
If you have debt, a raise can be hugely beneficial in getting it paid off. Once you've done that, you'll have even more money freed up.
"There are several different methods for paying down debt, and two of the most popular are the snowball and avalanche methods," explains Trina Paul at CNBC.* With the snowball method, people focus on paying off the smallest amount of debt they have first, working their way toward the highest amount. On the other hand, people using the avalanche method focus on paying the debt with the highest APR first. While the snowball method will end up costing you more in the long run than the avalanche method, those motivated by small wins might still prefer it over the avalanche method."
Improve Your Home
Perhaps you have home improvements that you want to take care of, but the costs have been holding you back. An increase in income might just be the spark you need to get these projects moving. Many improvements can get expensive, so it might be worth looking into options for financing. One great option can be a home equity line of credit. When you have more money coming in, it can be easier to keep up with your payments.
Save, Save, Save
Of course, one of the best ways to use your raise is to start saving more. If you have an emergency fund, add more to it on a regular basis. If you don't, now is a great time to set up a savings account for that very reason. You may also want to save for retirement or for a larger purchase. Either way, a savings account can help you work toward your goals, and with your increased income, you'll be able to achieve them more quickly.
Give to Charity
You can also use your raise as an opportunity to start giving or increase the amount you give to charity. Find one or more causes that you are passionate about and use some of your money to do some good in the world. If you were already living comfortably before your raise, this is all the more reason to give some help to others.
"Another way to spend your raise is to increase your donations to charities and nonprofit organizations," says Britany Foster at MoneyCrashers.** "Not only will it spread the wealth, but charitable donations typically count as tax deductions, potentially reducing the amount you owe each year. This is especially useful if your raise bumped you into a higher tax bracket."
Treat Yourself!
Your first inclination upon receiving a raise may simply be to treat yourself, and there's nothing wrong with that. After all, you've earned it. If there's an item you've had your eye on, but didn't want to spend the money before, perhaps now is the time to get it. Maybe there's a trip you've been wanting to take. Maybe it's time to schedule it. The nice part about a pay raise is that the increased income will likely continue, so you'll still have time to consider things like debts, charities, home improvements, and saving.
Congratulations for earning a pay raise. You should be proud of your work and the recognition you've received for it. Use this opportunity to improve your financial situation or your home. If you can spare it, consider contributing to a great cause, but don't forget to treat yourself and celebrate your new increase in income!
* https://www.cnbc.com/select/what-to-do-with-money-when-you-get-raise/