Got a Raise This Year? This Is the Single Smartest Thing to Do

Since the labor market continues to be tight in 2024, companies are planning for generous raises for many workers. In fact, one survey of more than 1,800 employers found companies were planning average salary increases of 4.00% this year.

Whether your raise is bigger or smaller than the average, it's what you do with your money that matters most. And when you're suddenly earning more of it, there's one smart decision you absolutely should make if you want the funds to lead to a brighter financial future.

Lifestyle creep

When you get a salary increase, it's easy to just let the extra money be deposited in your bank account and become part of the cash you have available to spend. If you do this, you may be surprised at just how quickly your spending increases and eats up the extra funds. This is called lifestyle creep.

If you don't make a plan for what to do with your raise, you may find the extra spending becomes a habit that doesn't make a positive impact on your life -- and that the funds end up frittered away by new everyday expenses with little to show for it in the end.

Rather than letting this happen, you should take action immediately upon getting the raise and divert some or all of it toward accomplishing an important financial goal that will improve your future.

Do this with your raise before you get used to spending it

When you get a raise, you have new money coming in that isn't already committed to existing expenses. So, before you get used to having it, you can arrange for it to be transferred to accounts that will help you accomplish your long-term financial goals. That way, you can make progress on growing your net worth and improving your financial security without having to make big changes to your current living standard.

If you don't have a lot of high-interest debt, investing the money in a brokerage account or retirement investment account could be the single best thing to do with the money. That's because you can make this extra cash work for you so it earns even more for you over time.

Say, for example, you were making $50,000 and got a 4% raise. You'd have an extra $2,000 coming in over the course of the year. If you invested that extra $2,000 every year for the next 30 years and earned a 10% average annual return (the average return provided by the S&P 500, historically speaking), you'd have $361,886.85 in your retirement plan. If you earned a 50% employer match on the money by putting it into your 401(k) plan and wound up with $3,000 going into your account, you'd have $542,830.27!

If you owe money on credit cards or other high-interest debt, you can set up automatic payments for the extra money coming in to pay down that debt until it's gone, and then divert the funds to your investments.

Putting this money toward your personal financial goals is likely to make you a lot happier in the end compared to succumbing to lifestyle creep and just spending it.