Getting a Raise in 2024? Here's the Smartest Way to Use the Extra Money

If you're lucky enough to get a raise in 2024, you have a great opportunity. You can use the extra income that you have coming in to make a meaningful difference in your personal finances.

You'll need to make an informed choice about what to do with the extra funds ASAP, though -- ideally, before you get used to having the extra money in your checking account available to spend.

So, what's the best thing to do with the cash that comes from a raise? Here's what you need to know to help you decide.

Use your raise wisely before you get used to the extra cash

One of the best things that you can do with the money you get from a salary bump is to divert it right into your retirement investment accounts.

See, the median retirement savings was just $87,000 in 2022 (according to research from The Motley Fool), which is not nearly enough money for most people to be on track for a secure retirement. A nest egg of $87,000 would produce about $3,480 a year in retirement income assuming you withdrew 4% of your account balance, which most experts believe is a safe withdrawal rate to avoid running out of money.

Since the average monthly Social Security benefit is just $1,907 a month, you'd be left trying to live on about $2,197 per month as a senior -- which isn't enough for most people, especially considering that healthcare costs tend to rise as you get older.

Unless you are already investing about 15% of your income for retirement, using your raise to inch up the amount you're saving could help you to far exceed the average balance and actually invest enough for a secure future.

Say, for example, that you were making $50,000 in 2023 and you got a 2% raise in 2024. You wouldn't be used to that extra money in your budget yet, so you could transfer the extra 2% right into your retirement plan and save an extra $1,000 a year. If your employer provides a 50% 401(k) match, that would bring your extra savings up to $1,500. Assuming a 10% average annual return, investing an extra $1,500 a year for 30 years would increase your retirement account balance by about $271,415.14.

Of course, if you get a raise every year, you could do even better than that. For every year you get a raise, you can divert some or all of the extra money to your retirement plan before you have a chance to increase your expenses. Do this until you hit the recommended 15% savings rate and you may be able to effortlessly hit your retirement contribution goals without making any major lifestyle changes.

Is investing your raise for retirement the right choice for you?

Investing your raise is a good option as long as you don't have a ton of high-interest debt you need to pay off, and as long as you have an emergency fund already in place. If you don't have three to six months of living expenses saved or you have credit card debt at a very high rate, you should most likely divert all the extra money from your salary increase to paying down your debt and saving for a rainy day first before investing -- as long as you're already earning your full 401(k) match. Try to at least earn your matching contributions, if you're eligible -- because you'd otherwise be leaving free money on the table.

The key, though, is to identify some kind of financial goal that will make a meaningful impact on your future and use some or all of your raises to accomplish it, rather than just absorbing the extra money into your checking account and spending it without thinking about it. By using your raises wisely, you can increase your financial security and you won't even miss the extra cash since you'll never have gotten used to spending it in the first place.