So you just got a raise at work — congratulations! While it's exciting to think about having more money in the bank each pay period, it can also be a good idea to start making plans to put that cash to its best use. It's generally easy to find ways to spend it on entertainment, dining and even travel. But a raise provides the perfect opportunity to help strengthen your financial situation going forward.
Before you decide what to do with the money, you'll want to determine what your new take-home pay will actually be, as taxes and withholding will decrease the amount you'll have at your disposal. Understanding how much more you'll actually see in each paycheck after you receive a raise will help with your planning. What you decide to do with that raise may also depend on which life stage you're preparing for financially. Here are some ideas.
1. Build an Emergency Fund
Emergency funds help provide a cushion for unanticipated needs. These could include a job loss, a medical crisis, unbudgeted home repairs or other situations where you need money that isn't in your regular budget or bank account.
You might consider saving three to six months' worth of salary in an emergency-fund bank account, as it could take a while to recover from unforeseen circumstances, especially if your income has been affected.
You might consider keeping this money accessible if you need it — meaning you wouldn't have to cash out stocks or similar assets to use it — but not so accessible that you can use the fund to pay your regular bills. For instance, you could keep a savings account that's separate from your checking account.
2. Pay Off Debt
Whether you owe money on your credit card, for school loans or something else, you're likely being charged interest for money you borrowed. The longer you owe the money, the more you'll pay in interest.
By eliminating debt earlier, you might be able to use the money saved to instead earn interest in a savings account. Consider paying off debt starting with the highest interest rate first.
3. Contribute to Retirement Savings
There's never a bad time to start saving for retirement. Thanks to compounding interest, the earlier you start saving, the more your money can earn for you over time. You may already have automatic retirement savings deductions set up for each pay period.
You can increase that amount and start saving more without necessarily noticing an impact on your personal income. But you'll notice the amount going up on the retirement account statements. It's always important to remember, though, that no investment type is guaranteed to accrue value, and investments may lose value over time.
4. Save for College
Whether your child is an infant or already in high school, putting money aside for higher education is a great way to help ease your family's financial responsibilities in the years ahead.
There are many savings vehicles for college funds, some providing tax benefits. If you already have a college savings account, you can use your raise to increase your contributions, either on a onetime basis or through regular automatic withdrawals from your paycheck or bank account.
5. Save for a Specific Personal Goal
Maybe you have a goal that requires a certain amount of money, like starting a business, buying a home, taking your dream vacation or renovating your kitchen. However you choose to use your money, it can help to set a goal that's specific, measurable, achievable, results-focused and time-sensitive (SMART), and then determine how your raise can help you realize that goal.
The good news is that you don't need to pick just one category for your larger paycheck after you got a raise. You can use the funds for several different goals — and even use some of them for a fun celebration. It's helpful, though, to make a conscious decision about what to do with the money. Consider meeting with a financial representative to help steer your savings in the right direction.