Plan For Your Pay Raise
Plan For Your Pay Raise
You finally got that promotion you’d been hoping for… and with it comes a nice raise. Well done! But before you start celebrating (well, maybe the day after) it’s important to devote a little time to readjusting your budget…
Otherwise, that extra money might not go as far as you’d like it to.
When you get a pay raise or a new job or come into monthly income through another means (royalties, residuals, etc.) it can be easy to overspend. There’s a big difference between not worrying about money and not thinking about money. And that can really come into play when you get an unexpected windfall.
In fact, as positive as a pay raise is, it’s also an opportunity for poor money management to sneak in and steal your wealth. An increase in income is an excellent chance to take a hard look at your money. It’s important to do some fine-tuning to make sure your money is working as hard for you as you are for it.
Here are four steps to take when you have an increase in income:
#1. Do the Math to Know Exactly Where You Stand
The first thing to do is to sit down and do a little math.
How much extra money does, say, a 5% pay raise mean for you? What does that work out to on a monthly basis? Are there other factors to consider… for example, will your amount of overtime change or will there be extra benefits or deductions that might change the numbers on your paycheck?
You will also need to review your taxes. Will this raise bump you into a new bracket? If so, by how much? You might want to consult your accountant on this one, just to be sure.
Once you’ve looked at the numbers, you might find that the raise isn’t as large as it looked at first. That’s important to know before you make big changes to your monthly living expenses. It’s easy to overestimate what you’ll be taking home and make big-ticket purchases that you could regret later.
#2. Pay off High-Interest Debt
Once you know where you stand, the next step is to make a plan to pay off high-interest debt. High-interest credit cards and loans that are not working for you are feeding your income to banks, and getting rid of that debt frees up your money so you can invest it in something better.
A great way to pay off debt is to use the “debt snowball” technique, where you order your debt according to interest rates. Start with your highest-interest loan and use some of the extra money you’re making to pay it off as quickly as possible. Then apply that money to the next card and so on.
Paying off credit cards isn’t a particularly fun way to spend your money, but cash that’s flowing out to pay off interest could instead be going toward investments, savings or even a vacation… which are all a lot more fulfilling than cutting a check to Visa once a month.
If you’d like to see how quickly you can pay off debt, here’s a calculator that applies the snowball method and allows you to plan out a strategy.
#3. Put Some Thought Into Where to Invest
Once you’ve allotted some of the extra money toward paying off debt, decide on an amount that can go toward investments. That might be money that goes directly from your bank account to an investment account or you might divert it to a separate account to save for real estate investing. Even if it’s just a small amount of money, it will add up over the long run.
If you have a long-term savings account or an overfunded life insurance account, this would be a great time to up your contributions to that as well.
Another thing to consider is charitable giving. Not only does giving help the cause you choose to contribute to but it might also help your wallet when tax time rolls around. Consult your accountant to see if you’re able to reduce your tax burden and help others at the same time.
#4. Last but Not Least: Enjoy!
Being practical is great, but it’s also important to enjoy life. Once you’ve thought it through and developed a plan, it’s time to celebrate! Go on that trip, do the kitchen remodel you’ve been wanting to do or plan an extra family outing once a month.
Once you know what your budget is, you can work within it and spend money without worry or guilt… and know that you’re making the most of the raise that you earned.