Getting a big raise can be both exciting and overwhelming. I remember my first significant pay increase. I switched jobs and instantly got a raise of somewhere between 25-30 percent. That may not be a lot to some, though to me it blew open various opportunities.
Then the questions came – all primarily around how I should handle the extra money. I did not have any consumer debt though I did have some remaining student loans. I wanted to pay those off but didn’t even know if that was the right thing to do given the interest rate.
I also wanted to do something fun with the extra money but didn’t know if that was the best thing to do. If you’re in a similar situation, here are some things to think through as you consider what to do with your extra money.
Pay off Your Debt
Your situation will likely be different than mine. That’s to be expected. That being said, if you just got a big raise and have outstanding consumer debt, you should consider finding a way to kill that debt once and for all. My suggestion is to start with the highest interest rate debt and go from there.
The hope here is to pay off as much, if not all, of your debt as possible. While I used a significant amount of my raise to pay off my student loans, that’s up to you. From my standpoint, it was worth it to become debt free. You may feel differently, and that’s ok.
I know this flies in the face of paying off debt. The last thing we should be is wasteful with our money or jump head first into lifestyle inflation. That’s not what I’m arguing for here.
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What I am saying is that it’s perfectly acceptable to take part of your raise and put it towards something you enjoy. Take a look at your interests and adjust your budget accordingly – though be mindful of this if you still have debt. Life is meant to be enjoyed, just make sure to do so within reason. Personally speaking, we increased how much we put away in our vacation fund as we value being able to travel.
Build Up Your Emergency Fund
I know emergency funds aren’t exciting. They really aren’t meant to be; they’re meant to provide protection. If you just got a significant raise, consider putting some of the extra money towards your emergency fund each month.
Most experts tend to say you should have 3-6 months of your monthly expenses in an emergency fund. I tend to take that a step further to include everything you need to get by in a month. Regardless of which approach you take, put a certain percentage of your increased take home pay towards your emergency fund.
Invest, Then Invest Some More
I was most excited to start investing more after receiving my raise. While I had been saving money in my 401(k) to get the company match, I did very little outside of that. The increased income changed that for me. I now had extra money I could start investing in stocks.
If you’re already investing in your 401(k), great. You can use a portion of your extra income to build on that. If you don’t have a retirement account outside of your 401(k), find an online brokerage and open a retirement account. The key here is to begin thinking with a long-term mindset of how the extra money in each paycheck can help you reach your goals.
Refocus Your Goals
I believe refocusing on your goals is the true key to handling a big pay raise. This will take some time to think through, and that’s ok. The point is to give your income purpose to shape decisions. Ask yourself questions like:
- Do you want to become debt free?
- Do you want to start a business?
- Do you want to retire early?
- Do you want to travel more?
These questions only scratch the surface, though you get the point. Think through what you want your life to look like and find a way to use the increase in income as a way to help make that possible.
Getting a big raise is exciting. It’s absolutely fine to enjoy that increase in income somewhat, just make sure to think through how that extra money can help you get to where you want in life.