So, you’ve been working hard to earn more income, you have been putting in the overtime and making yourself as productive and useful as possible. The boss finally realizes that you are worth more at your job and decides to give you a raise. Yay! What do you do with the extra money you are making?
I think this question has a lot to do with where you are at in your path to financial freedom. If you still have debt and are still working to pay it off, then your choice is easy, just apply the extra to your debt and become debt free sooner! However, if you are out of debt and have a fully funded emergency fund of three to six months, where do you go from there? I think at this point you have a nice foundation laid down and you can now work off of percentages.
So, say you get a raise of $10,000 a year. And by raise, that could mean that you switch jobs to take another job where you end up making more. Maybe you want to get more money in the budget for groceries, vacation, or even car replacement. These are all great things to add in, but they are not necessities. By using percentages to give raises to your different budget amounts, you are able to raise the different budgets you get at a decent amount while still making sure you give priority to accomplishing your goals of achieving financial freedom (assuming that’s your goal). Maybe you put 60% of your raise towards your financial goals and 10$ of it goes to giving while the remaining 30% go towards upping your lifestyle. I love this idea of percentages and I think if more people applied it when they got increases, they would be able to see the best of both worlds.
What do you think? When getting a raise, are you going to just spend it each month or are you going to plan out the usage of it so that you can accomplish your goals?
Here are some other things you can be doing when you get a raise:
At least for a couple of paychecks. Find out how it really affects your paycheck. You are going to be paying more in taxes due to the raise, and you don’t want to be putting the cart before the horse, so to speak. Wait until you actually see the numbers and then find out how much you are actually going to have to adjust for.
Look at Your Budget
You will want to review your budget and see where you can make the most progress. If you’ve been living on rice and beans for a while, maybe this will be the chance you can up your grocery budget a little bit. Look over your budget to make sure that you aren’t already putting unnecessary payments towards too many extra things and see where you can cut back to free up even more money as well. This is where using those percentages is really going to yield you some extra payoff. Make sure your debt is taken care of and your savings are topped off before making that next tech purchase or take that next vacation.
Follow the Baby Steps
Wherever you are in the Baby Steps, continue to follow those steps with your new raise. Whether that means you can pay off debt faster (baby step 2), fund your emergency fund faster (baby step 3), increase your retirement investing, kid’s college, or even your mortgage payoff, make sure you are working these steps and work towards financial freedom!
Upgrade Insurance Plans
Maybe with your new raise, it will give you the breathing room to afford more insurance if you are not already topped off? Look at your different insurance policies (auto, home, life, disability, id theft, etc) and see if they need any tweaking or upgrading. This is the perfect time to do it since you won’t feel the hit if premiums end up a little higher.
What can be more fun then being able to help others in need out? Maybe your raise, or a portion can go to some type of charitable giving or somehow impacting others in need. Giving is a great way to help others and gives a deep sense of self worth and makes you feel like you are doing a good thing. And, on top of that, giving allows us to deduct it on our taxes, reducing your new tax situation.
Plan a Party
Do something fun with some of it. There is no reason that you shouldn’t be able to enjoy some of it. Just make sure that you are not overspending as that’s very easy to do. Track what you are going to purchase and limit it to less then your raise is going to be. Don’t be the person that goes out and gets a new car just because the got a $1/hour raise.