How to Spend Your Raise

Congratulations! Your hard work and contributions at the office have been recognized and you’ve earned yourself a raise. You might be tempted to start spending it right away, but this is probably a bad idea. Be cautious about raising your budget and lifestyle in a permanent way after getting a raise — it can make it harder to get ahead over the long term. And it’s also a good idea to check with your financial or tax advisor to see if you need to consider increasing your withholding, especially if your raise pushes you into a higher tax bracket.

Once you get a handle on exactly how your raise will translate into more after-tax dollars in your paycheck, the next decision is what to do with the extra money you’re earning. If you play your cards right, you can set yourself up for a better future and have a little fun while you’re at it.

Ramp up Your 401(k) Contributions. This should be your first move, especially if you haven’t already maxed out your company match. If you don’t, you’re leaving money on the table. And there are additional advantages to be gained when it comes to your tax bill from Uncle Sam by putting more of your pretax dollars toward retirement.

Add to Your Emergency Fund. Do you have at least three months of earnings set aside in your emergency fund in case of a job loss or other financial crisis? If not, take a portion of your raise and start building it up. Your emergency fund should be in a very safe, highly liquid savings vehicle, such as an FDIC insured high-yield savings account. That way, you can get at the money when you need it, and it will be better protected from market fluctuations.

Downsize Your Debt. Use your raise to pay down consumer debt, especially any higher-interest revolving credit accounts like HELOCs or sub-prime credit cards — you’ll feel better with less debt on your back and you’ll save on costly interest payments to your creditors. You could also look at paying down your car loan or any student debt, especially if they carry higher interest rates.

Invest in Yourself. Consider what you could do to prepare and better yourself for your next big career move — or to improve your health. Maybe there’s a gym you’ve been wanting to join, or classes you could take to pick up some marketable skills? Or is there a professional organization you could belong to that might open some doors in the future? Who knows — with a little self-investment, your next big raise might be sooner than you think.

Increase Charitable Contributions. If there’s a charity that you support, consider sharing your good fortune with those less fortunate. So whether it’s a local homeless shelter, animal rescue group, medical research foundation or the church in your community, think about whether you want to start or expand your charitable giving efforts with a portion of your raise.

Enjoy Yourself. Take some of your newfound funds and reward yourself for a job well done. Is there a special vacation you’ve been itching to take? Or some home improvements to help make your time away from work a little more enjoyable? Remember, money isn’t just for saving, so take a little and treat yourself. After all, you’ve earned it.

source: https://www.forbes.com/sites/markavallone/2018/08/12/5-things-to-do-with-your-raise-or-bonus/#29c5f3281d95