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7 Things to Do When You Get a Raise at Work

By Jacqueline Curtis

raiseGetting a raise is probably one of the best feelings in the world. After all, it boils down to your boss essentially saying, “You’ve done an excellent job and deserve to be compensated.”

However, it can also be a double-edged sword. Sure, you’re going to make more money, but that feeling of financial well-being could also go to your head and lead to some poor financial habits. The trick to getting a salary increase to really pay off is to make the right choices in the days, weeks, and months following it.

My husband recently switched to a new position at his company and received a raise. At first, we were excited about the opportunities it offered. However, after the dust settled, I found myself feeling more anxious about the new income, not less. Rather than being relaxed and happy, I was worrying about spending our new windfall before it even hit our bank account, and about making subsequent, possibly unwise, adjustments to our lifestyle simply because the money was there to spend.

How to Handle a Raise

The trick to making your pay raise work for you is to plan properly where each new dollar should be spent. Those big purchases you’ve been putting off are going to be very tempting now, but it’s important that you keep your priorities in order and avoid making unwise choices. If you’ve received an increase in pay, celebrate modestly, let it sink in, and when you’re ready, begin planning what to do with the extra funds.

1. Wait a Few Weeks

You may be surprised by how much of your raise goes to taxes and other withholdings. Divide your new pay increase by 26, tack it onto your biweekly paycheck, and then determine the portion that goes to the government and the portion you get to keep. If that proves to be difficult, simply wait a couple of pay periods before making any extra purchases to see how your new raise is apportioned and how much you get to hold onto.

2. Reassess Your Budget

Before you allocate money to new budget categories or decide to add more money to underfunded ones, try assessing your budget and cutting some of the fat. If you don’t already use one, of course, now is the time to start.

To create a budget, list all your outgoing expenses, including fixed monthly bills and discretionary purchases such as meals out, concerts, and vacations, as well as amounts you put toward savings, investments, and donations. Review your bank and credit card statements for the past three months to get a good idea of your history with discretionary purchases. And don’t forget to budget for non-monthly expenses, such as biannual insurance payments and annual taxes. Then, compare all of these to the amount of money you earn.

After you’ve reviewed your budget, start thinking about where your raise is going to do the most good. For example, you may want to put more toward savings or paying off any debts you may have before pulling the trigger on that new iPad or taking that Disney vacation. Just because you’re earning more money doesn’t mean you should throw it away on purchases you don’t need. Extra funds should first go to retirement accounts, general investments, and other wealth-growing tools.

3. Retool Your Retirement

Once your daily expenditures have been addressed, take a close look at your retirement portfolio. More money means you can make a higher monthly contribution, which in turn means more retirement income. According to MarketWatch, if a 35-year-old earning $60,000 per year were to increase retirement savings by just 1% of salary – $50 per month – it could result in an additional $270 per month in retirement income, assuming a 7% rate of return and retirement at the age of 67.

Retooling your retirement savings means more money going toward securing your financial future – and less toward those little extras you don’t need. If you’re under the age of 50, you can currently contribute up to $5,500 per year to a Roth IRA. You do have to pay taxes on those contributions, but when the time comes to withdraw them, they’re tax-free. You should also consider increasing your 401k contributions, especially if your employer offers a match.

extra money

4. Pay Off Debt

By paying down debts, you waste less money on interest and can improve your credit score. These benefits may not give you the instant gratification you get from a shopping spree, but they can reduce your money-based stresses and make for a much healthier financial picture. Tightening your belt and living frugally now can allow you to clean up past financial missteps so they stop taking a toll on you.

I personally use the technique of paying off my smallest debt first and then moving onto the next one. Not only does this help get rid of little fees and small interest charges that weigh my budget down, but the motivation of paying a debt off in-full is sometimes all I need to tackle it.

5. Plan for Taxes

No one likes tax time, and self-employed people like myself have it tougher than most. That’s why I made sure to assess and plan our taxes the moment my husband started receiving his new salary. While his increase doesn’t affect what I report, it does affect our deductions and credits.

Be sure to withhold the proper amount from paychecks to account for your new tax situation. If the raise has come through your employer, talk to HR about increasing your withholdings. To determine the exact amount to withhold yourself, grab your most recent paystubs and input your new wages into the IRS calculator. Or, ask to have them adjusted directly through payroll.

If you’re self-employed, use a tax estimator to make sure you’re putting away enough for those quarterly payments. You can do that by using IRS Form 1040-ES.

If you’re counting on your usual tax refund check, keep in mind that you may be pushed into a higher tax bracket when you start earning more money. Credits and deductions may no longer be applicable, so talk to a tax professional and prepare for the possibility that you may owe more next April.

6. Increase Charitable Donations

Increasing your charitable donations isn’t just a nice gesture – since donations to tax-exempt organizations are deductible, it can help reduce your new tax burden. Rather than setting aside a specific amount or donating month-to-month, my husband and I designate a percentage of our total income to put toward charitable contributions. That way, it’s easy to adjust the amount we give based on a shifting salary. Knowing that we’re setting aside 10% of our income makes it easy for me to budget around donations, and to calculate their implications on my taxes.

While it’s obviously a personal choice, bumping up charitable donations when your salary increases means spreading a bit of your good fortune around, as well as relieving some of the negative effects of decreased tax deductions and credits. However, if you’re not comfortable donating money, you can choose to donate goods instead. Keep track of what you give and be sure to ask the charitable foundation (if it is a tax-exempt organization) for a receipt so you can deduct those items at tax time.

7. Do Something Fun

Be sure to do something fun to celebrate. Depending on the size of your raise, you may want to go out to dinner with friends, buy a new electronic gadget, or plan a family vacation – just make sure what you choose is in line with your budget. Even the most stalwart savers should take a moment to acknowledge the achievement of being recognized at work and the new opportunities that a higher salary offers.

Final Word

As you bask in the glow of a job well done, planning ahead for your new future should stay in the forefront of your mind. You’ve worked hard and earned your raise fair and square, but it isn’t a windfall. Make sure your money is working as hard as you are. By putting a plan into action, you won’t be left scratching your head and wondering where all that new money went when the end of the month comes.

Have you gotten a raise recently? What’s the first thing you did when you got the news?

Jacqueline Curtis
Jacqueline Curtis is an experienced style expert, and she focuses on getting high fashion on a tight budget. She writes for several online publications, including her own fashion blog, How Not to Dress Like a Mom, and specializes in fashion, finance, health and fitness, and parenting. Jae grew up in Toronto, Canada, but now resides in Utah with her husband, two kids, and prized shoe collection.

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  • http://www.mybusinesscentral.com.au/ Mybusinesscentral

    My big personnel thanks to you for sharing this.I must appreciate your excellent work. I find the blog post very interesting and moreover very informative. I am thinking to write a piece on related topic.

  • Sean

    Great article!

    When I got my raise I immediately took it and finished off my student loans (22K in 28 months). Now I use the extra money to save and pay off my car faster!

    I love your advice on raises and I wish more people knew this! Another pitfall I see my friends (we are all around 25) making is in the area of windfalls…

    No foresight! Windfalls should provide future cushion! Not meaningless BS now!

  • Bill

    My raise equates to less than inflation, so never mind this article.

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