8 Ways To Make The Most Of A Big Raise

March 05, 2018

“I’m so tired of driving this old beat up car. As soon as I make some more money, I’m getting my dream car. I deserve it.”

“We have so outgrown this house. There just isn’t enough space for us, to entertain, or for anything really. As soon as I make some more money, I’m getting my dream house. It’s about time I get something I really want.”

“I can’t even remember the last time I had extra money to just splurge with. As soon as I get a raise, that’s the first thing I’m putting money aside for.”

Have you ever found yourself saying some version of these things to yourself? I can definitely relate — early on in my career, I often found myself daydreaming about the ways I would spend additional income.

Hitting the pause button

Depending on your line of work, big bumps in income may come along often or only rarely, but regardless, when they do, it’s easy to quickly start dreaming of a bigger home, nicer car or even just a fancier wardrobe. At the extreme, many of us think that having a higher income will make our lives easier, only to find that when we look back over the years of small increases, nothing’s really changed in the way we feel about our financial situations.

The next time you find yourself with a bump in income, before you start bookmarking properties or loading up your shopping cart, PAUSE. This is the perfect time to consider how to make the most of your new pay rate and to ultimately make sure that you never have to revisit these thoughts again.

Here are eight suggestions that may not sound very exciting, but when taken seriously, can get you to the point of NOT needing a big raise in order to have the life you want.

  1. Accelerate debt payoff – Use the Debt Blaster calculator to find out just how much sooner you can get those lingering student loans or credit cards paid off by adding a bit more to your monthly payments.
  2. Bump up your emergency fund – More income means you’d miss it more if it went away, so use this time to add to your savings BEFORE taking on more financial responsibilities (like a new car or a bigger house) that make it harder to do so.
  3. Max out your Health Savings Account (HSA) – Maybe you haven’t elected the High Deductible Health Plan (HDHP) before because you didn’t want the risk of having a big out of pocket hit, which often makes sense for situations where money is tight. Now that you make more money, the risk may be outweighed by the opportunity to save more tax-free for future expenses, like starting a family.
  4. Contribute more to your 401k – Retirement may seem way off (especially if it literally is), but saving more in your earlier years will give you more options for later years. Use the Retirement Estimator calculator as a way to gauge how even just one percent more saved at a young age could mean retiring a year or more earlier than you expect.
  5. Save for short and long-term goals in a Roth IRA – You can put an extra $5,500 into a Roth IRA for 2018, and even more if you’re 50 or older. When just starting out, a lot of people actually use a Roth IRA as savings account. Since whatever you contribute you can always take out tax-free and penalty-free, it can be a way to build up an emergency fund, while also boosting your long-term savings. Check out these 12 benefits of a Roth IRA on top of that. (By the way, you can still make a 2017 contribution to a Roth IRA by the tax filing deadline of April 17, 2018.)
  6. Purchase some stock through your Employee Stock Purchase Plan (ESPP) at work – If your employer offers an ESPP, it’s a great way to get more bang for your buck because you purchase shares of your employer’s stock at a discounted price. You can leave that money alone until retirement or some people prefer to sell right away to take the earnings from the discount, then put that money toward their next big vacation.
  7. Think bigger – Is there something really cool that you’d love to have, but always figured you could never afford, like a vacation property, or a cleaning person? Depending on how big your income jump is, and assuming you have the Big 3 (emergency fund, no high interest debt and saving enough for retirement) in place, perhaps it’s time to shift your money mindset to something you never considered a possibility before, rather that using the additional money to just upgrade to a bigger house or fancier car.
  8. But not too big — Beware of lifestyle inflation: our “needs” tend to grow as our income grows. I’m not suggesting that you continue to live like a college student, but living below your means is the key difference between most “everyday” millionaires and those who may earn the same salary, but spend every dime they have.

At the end of the day, the point is to enjoy life and a part of enjoying life is having enough money to pay the bills and save for the future while still living in the moment! You put in the hard work needed to get to this new income level. Now, make the most of it by putting some of that extra money towards living life now and making sure you are financially stable in the future.