Getting a Pay Raise? 6 Dos and Don'ts You Need to Know

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  • A pay raise could change your financial situation for the better.
  • Find out what steps you should and shouldn't take so you don't waste your pay raise.
  • Extra money should figure into your budget, savings, and future financial plans.

A pay raise can give you more money and improve your life, but make sure you make the right moves to get the most out of the extra income.

Are you getting a pay raise? Congratulations! Your hard work is being acknowledged, and you'll get a monetary reward for your efforts. Getting a raise is a big deal, and for many workers, it can positively impact their financial situations. It's essential to take the proper steps to get value out of the additional income you bring in.

If you're not careful, you could spend all the additional money you make, and you may end up in the same financial situation you were in before your raise. But with a plan, you can figure out the best way to make your new income boost work best for you.

If you're looking for guidance on how to handle a pay raise, review the following dos and don'ts:

1. Don't ignore your budget

Setting and following a budget is an excellent way to manage your money. No matter your income level, a budget can guide you, so you're able to stay on top of your money goals.

If you've gotten a raise recently, take some time to reevaluate your budget. Make some adjustments if necessary, but don't stop budgeting. Without a budget, it's easy to spend more than you can afford, and you could risk accumulating debt.

2. Do increase your savings and retirement contributions

Saving for the future is essential. You can prepare for emergencies and upcoming expenses by contributing to a high-yield savings account. Additionally, you can save for your retirement years by contributing to retirement accounts, like an IRA.

A pay raise can give you more flexibility to set more money aside. Once you get a raise, you should consider boosting your contributions.

3. Don't rush to make sudden large purchases

As you see bigger paycheck totals, you may be tempted to make large purchases. While it's okay to reward yourself for your hard work, you should always carefully think through any costly purchase. Make sure you're making a sound financial decision so you don't regret your choice. The last thing you need is additional stress in your life due to a poor buying decision.

4. Don't upgrade your entire life

A higher income could allow you to make some positive changes in your life. But don't fall into the trap of upgrading your life so much that your entire pay raise becomes nonexistent.

As you decide what kind of life you want to live, carefully consider the costs associated with any changes that you plan to make. Instead of upgrading every aspect of your life, consider which upgrades will bring you the most value and be the best choice for your goals.

Some upgrades could significantly improve your life, but others may result in wasted money. For example, it may be a good idea to hire a professional cleaner if you hate doing housework.

However, purchasing a brand new convertible may be unnecessary -- and could cost more than your pay raise when you factor in the total cost of a car loan and car insurance.

5. Do plan for taxes

An increase in income could put you into a higher tax bracket. Make sure that you consider the tax implications of your pay raise, so you're not surprised when tax season rolls around.

If you're due for a raise, figure out how your new income will be taxed. You may want to adjust your withholdings with your employer. If you need guidance, consult with a tax advisor.

6. Do continue to monitor your spending

No matter how much money you bring in, it's a good idea to monitor your spending regularly. When you get into the habit of doing this, you'll be more aware of where your money is going, and it's easier to spot unnecessary purchases and make adjustments if necessary. If you're getting a raise, continue to keep an eye on your spending.

If you make smart money moves with your additional income, you may be able to reach your personal finance goals sooner and feel more comfortable at your higher income level. Prepare accordingly, so you don't waste your income boost.

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