Tip of The Week: When You Get a Raise, Save More, Don’t Spend More.

While every company is different on how they handle raises some do it on an annual schedule and others offer performance based raises, regardless of how your company handles it, getting the big raise you’ve been working towards can always seem to be an exciting time. Anytime you get a raise it’s important to reward yourself for your hard work maybe a nice dinner or an outfit you’ve had your eye on but once you’ve rewarded yourself it’s important to be disciplined with how you spend your money.

Consider Taxes- If your raise is X number of dollars an hour or X number of dollars more each year it’s sometimes easy to justify increasing your spending because you think you’re going to see all of that money but it’s important to remember the fact that as your pay goes up, so do your taxes. If the raise you get is substantial enough it can even push you up to a new tax bracket so before you go on any spending sprees take some time to do some math and see how this raise is going to affect your taxes, sometimes it may even be worth setting up an appointment with your accountant to see how you can start planning now for tax season.

Pay Down Debts- Unless you are fortunate enough to be independently wealthy, chances are you have some debts. Whether you have consumer debt on your credit cards, student loans or a car or house payment there are always debts that you can benefit from paying more money towards. While some people think it’s better to work on building up your savings it’s important to understand that any interest you might gain by having your money in the bank will be dwarfed by the suffocating interest that you’re paying on your car, house, and credit cards. Also, if you’re paying down these items you’ll be building equity in them which can be used like a savings if you find yourself in a tight spot by getting a title loan or home equity line of credit.

Invest in Yourself- If you got that raise there is a reason you did, because you stood out above your other coworkers. The corporate world can be incredibly competitive so to be able to continue to stand out above your competition so to be able to continue to stay above your competition there are several things you can do to invest in yourself. Everyone’s job is a little different so what you can do to invest in yourself will be catered towards your profession but there are workshops, courses, certifications programs, even going after a masters or doctorate degree can be a great investment of your time and money. Oftentimes larger companies will be willing to contribute to your education and they also see it as a sign of you trying to be the best you for the company so it can lend itself to future promotions. While it’s not as fun as some of the other ways to spend your raise, it can pay off the most in the long run.

Start Saving Big Ticket Purchases- Now notice we’re not saying to run out and put a big ticket purchase like all new furniture, a new television or a boat on your credit card but if there’s a big ticket item that you’ve been dreaming about for a while this raise can be the perfect opportunity to start saving for it. With the new money you can set aside a sub account in your savings account and start setting aside part of your pay each month to go towards that item, the most important thing is to not make these big ticket purchases on spur of the moment decisions because they can lead to buyers remorse. By taking time to save up towards these purchases you may find that by the time the money is saved up you may want something completely different than you were saving up to buy in the first place.

Minor Repairs- If you have been living paycheck to paycheck or close to it for some time there are likely minor repairs to your home or cars that you have let slide for a while. Getting a raise is a great opportunity to get caught up on these minor repairs that may have not been a big enough priority previously. Whether it’s the garage door that is broken, the dryer that is not working quite right, or the rain gutter hanging off your house it’s good to get caught up with these repairs from time to time.

Build an Emergency Fund- As we mentioned above its good to work on paying down your debts because the negative interest you’re paying on credit card fees and home or car loans far outweighs the positive interest that you’re making by having your money in the bank. With that said it is good to have an emergency fund set aside just in case something comes up. The ideal emergency fund would be working towards building a savings that you could live off of for six months if you were to lose your job tomorrow. While you don’t want to plan on losing your job, having this money set aside can be used to for other expenses that might come up such as medical bills, dentist visits, etc..

Retirement- If your finances were on point before your new raise and you have had no problem paying your bills and even setting aside a little money in savings already, this raise can be a great opportunity to focus on building up your retirement. Most larger companies have a 401K or Roth IRA retirement account that you can invest into and some companies will even offer a dollar for dollar match up to a few percentage points so while it’s hard to think about retirement now while you’re at the peak of your career, planning ahead now will lead to a much more comfortable retirement down the road.

Flex Spending Account- If the company you work for offers a flex spending account that you haven’t been utilizing up until now, now would be a great time to start utilizing that. Flex spending or “cafeteria plans” allow employees to set aside money for medical expenses and then use that money for doctors’ visits, prescriptions, braces, etc.. without having to pay taxes on it. The best way to know how much to set aside each paycheck is to look at your medical history over the past couple years and see how much you’ve spent each year, once you’ve found the average amount you spent you can work towards setting aside that amount. If there are some bigger procedures that you have wanted to get done such as lasik or braces then you will want to work on setting aside enough to cover the expense of those procedures.

Pay Down Principle- Most people don’t know that most of the money they pay every month on their car or home loans is only going towards interest, if you end up getting a raise it would be a very wise investment to start paying down more of your mortgage. By paying more on your mortgage each month you will start paying the principle down which will decrease the lifetime of your loan as well as the total amount you end up paying. Every lender is a little different when it comes to how they allow you to make payments on principle, sometimes you have to specify that’s what you’re doing so check with you lender first.

College Funds- Despite the down economy, tuition fees continue to go up. With that in mind it’s never too soon to start a college fund for your children. Even if it’s just opening the count and putting $100 in now for each child, at least it’s a start.

Save For Vacations- Most people get in the habit of putting their whole family vacation on a credit card and then paying it off throughout the year. This year plan ahead by mapping out exactly how much your family vacations are going to cost and then working towards getting that money set aside throughout the year rather than trying to fight to pay it off after the fact.

As you can see there are several smart ways to spend your new found raise, by working at spending your raise the right way you can build considerable wealth for your future.

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