What to Do When You Get a Raise

In 2022, the US inflation rate was the highest it had been since the early 1980s (1).  This puts a lot of strain on the income Americans are earning.  Getting a raise, especially a significant one, can go a long way to helping pay for those increases in goods and services.  In some cases, it can also be as much of a curse as a blessing.  Here are some smart steps you can take to make the most of your raise.

Plan for Taxes: Increased income may also mean increased taxes.  Keep in mind that your raise is a pre-tax figure, so if you’re getting a $10,000 raise, you also need to factor in Federal, OASDI, State, and possibly Local taxes.  Depending on your state and federal tax bracket, taxes alone can eat up a lot of that extra cash flow.  Does your raise go so far as to put you into a new tax bracket?

Review Your Budget: Look closely at your current budget or create one if you still need to do so. Linked Here is an article that goes into more detail on budgeting effectively.  Factor in your new income to determine how it will impact your financial situation, and make sure you are prioritizing savings as well.

Pay Off Debt: If you have any high-interest debts, like credit card balances or personal loans, prioritize using a portion of your raise to pay them down faster. This can save you money in the long run and puts you in a better position to enjoy that extra cash flow. 

Build an Emergency Fund: An emergency fund is the foundation for any strong financial plan. The dollar amount you need will change depending on your circumstances.  For example, a business owner with unpredictable and possibly seasonal income needs to set aside six to twelve months' worth of expenses. Compared to a married couple who are both working, have great job security, salaried positions, and good credit with low usage, they can be comfortable with three to six months of expenses.  Find a number you are comfortable with to provide a safety net in case of unexpected events.

Increase Retirement Contributions: Consider boosting your contributions to your retirement accounts, such as a 401(k) or an IRA. This will help you take advantage of compound interest and secure your financial future.  This may also help with potential tax issues, as I mentioned at the beginning of this article.

Adjust Lifestyle, Responsibly: It's okay to treat yourself a little, but avoid splurging excessively.  While it's tempting to increase your spending as your income grows, try to maintain your current lifestyle to a reasonable extent. This will allow you to save and invest more effectively.  Remember that increasing your lifestyle during your working year also increases the savings you’ll need to support that lifestyle in retirement.

Review Your Long-Term Goals: Take this opportunity to reassess your long-term financial goals. If necessary, adjust your strategies to align with your new income level.

Remember that the key is to strike a balance between enjoying the benefits of your raise now and making strategic choices that will benefit your financial well-being in the future.

Written by: Justin Meyer 

1. https://www.worlddata.info/america/usa/inflation-rates.php#:~:text=During%20the%20observation%20period%20from,year%20inflation%20rate%20was%203.0%25.

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