Congratulations -- after getting in front of your boss and making a strong case, you've finally been granted a raise. Getting more money is always a good thing, so you'll want to capitalize on the opportunities it offers. Here are a few important moves to make once your pay takes a turn for the better.
1. Figure out how much more money you'll be getting after taxes
A $3,000-a-year raise doesn't mean $3,000 more in your pocket. There's the pesky little matter of taxes to consider before making plans to spend that money, so hold off on major purchases before your first couple of paychecks come through, and figure out how much of that pay boost you'll actually wind up with month after month.
Keep in mind that if you're participating in your employer's 401(k) and are signed up to have a certain percentage of your earnings deducted for that plan automatically, once your raise goes into effect, your contributions will increase as well. While that's certainly a good thing, because it means you'll start saving more for retirement, it also means that you might get less money in your actual paychecks, which could impact other financial decisions you're making.
2. Boost your emergency savings
A frightening 40% of U.S. adults don't have enough money in the bank to cover a mere $400 emergency. If you're lacking in near-term savings, then the first thing you should do upon getting a raise is boost your personal safety net. This should trump even your retirement savings, which are important, but still not as crucial as having money on hand for the unforeseen.
3. Ramp up your retirement plan contributions
Getting a salary boost is the perfect opportunity to increase your 401(k) contributions, so if you're already signed up to have a certain percentage of your earnings hit that plan, you might earmark your additional earnings for long-term savings as well.
Imagine you currently earn $50,000 a year and are saving 3% of your income, or $1,500. If you get a $3,000 raise and don't need that money to pay your bills, you might adjust your savings percentage to 8.5% so that you're now contributing $4,500 a year to your 401(k) instead of just $1,500. And if you're curious as to what sort of impact that might make, saving an additional $3,000 in a single year will leave you with $22,800 extra in 30 years' time, assuming a 7% average annual return on that money.
4. Keep the same budget
Once your raise kicks in, you may be inclined to start spending more on a monthly basis, what with the additional income you have coming in. But tempting as that might be, you're actually much better off leaving your budget alone. If you maintain the same level of expenses, you'll have more money left over to save for more important goals, so don't be too quick to tie up that extra cash.
It's not every day that a raise comes your way, so if you've earned one, be sure to put it to good use. That way, you'll have more financial flexibility during periods when your employer isn't quite as generous.