Receiving a raise is a very exciting point in your financial journey. It means you are doing an exceptional job and you are being recognized for your hard work and efforts. It is crucial that you don’t take your raise and instantly book that Hawaiian vacation or buy yourself a new car. Even though these types of purchases may be tempting with your new income, it is very important to stick to a budget and allocate at least half of your new raise to savings or investments.
One of the first things to do after receiving a raise is to figure out your net pay after taxes. If you are not sure how to do this, wait until your first paycheck with the new raise comes in and deduct your original pay to reveal what the net pay of your raise is.
A pro tip: have a plan for every dollar that you earn. This is why budgeting is essential to creating financial security. You should create a budget based on your income and expenses at the beginning of each year based off of the numbers from the previous year. Once you receive a raise, if possible, we recommend not making changes to your budget until the end of the year. Simply set aside the extra income into a savings account. You made a budget at the beginning of the year for a reason so stick to it. Having extra savings at the end of the year will allow you to increase certain areas of your budget for the following year.
One of the easiest ways to make sure you don’t blow the extra money is to set up an automatic transfer for your additional income directly into your savings account.
If putting all of your new income in a savings account isn’t an option, another recommendation is to add half to a revised budget and place the other half in savings. However, even with this plan we suggest waiting at least three months to see exactly how much extra income you receive after taxes and other expenses before expanding your current budget.
Increasing your monthly savings after a raise helps you set a solid foundation for your future and your retired self will be thanking you!