What to Do First When You Get a Raise

You’ve worked hard for this, and the day is finally here: You’re getting your first paycheck reflecting the raise you successfully negotiated. But as anyone who’s ever received a windfall can tell you, money has this tendency to disappear on you. One day, you’re looking at your newly flush bank account, the next, you’re looking at the same lowly balance you’re used to. Where did the money go?!

(My guess: Online shopping and takeout. Happens to the best of us.)

That’s why when you negotiate a raise, the next thing you have to do—after wiping the sweat from your palms—is figure out what to do with that additional money you so rightfully deserve. You can’t just leave it to chance, planning to save after having a little bit of fun with this first paycheck. Instead, you need to give your money a job.

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Automate your raise

Before you decide what to do with your extra money, you need to know where to put it. “It’s really easy to lose track of a small raise,” said personal finance educator and author of A Cat’s Guide to Money, Lillian Karabaic. “When it’s just $60 or so extra dollars a paycheck, all that money seems to just slip through your fingers.”

She recommends creating a system to use your raise toward your financial goal. If you’re not planning to move that money into your employer-sponsored retirement account, which will move the funds automatically, you’ll have to hide the money from yourself to ensure you don’t spend it.

“Most employers will let you split your paycheck into different accounts via a form you get from HR,” she explained. “If you got a 3% raise, you can set up 3% of each paycheck to go into a special savings account.” That designated account can be where you accumulate funds for your savings goal, or it can be a temporary holding spot—say, if you want to automate transfers from that account to your credit card bill.

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Whatever you do, spend a few minutes setting up a system now that will prevent you from getting loosey goosey with your new cash. If you set up your direct deposit or create a set of automatic transfers, you won’t feel the sometimes-painful “squeeze” of saving, Karabaic said.

Where to put your new money

Now that you know to plan to put your money somewhere special instead of leaving that extra income to chance, You have three main options for what to do with your money.

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You can use it to pay down debt. If you have student loans, credit card debt, or lingering medical bills, using your additional income can help you pay them off more quickly.

If you choose this route, tackle the debt with the highest interest rate first. For example, strictly hypothetically, if you have credit card debt at 18% interest, a car loan at 4% interest and student loans at 3% interest, it makes no sense to worry about making extra student loan payments when you have that credit card interest canceling out your shiny new raise.

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Focus on paying off debt with interest of 5% or more first, then work your way down. And remember that if you have a lot of debt, this is still going to be a marathon, not a sprint.

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If you’re not in debt—and even if you are—you may want to consider funneling your money toward your retirement savings. This option is perhaps the easiest to do because you can simply adjust the percentage of your salary to have moved into your 401(k) each time you get paid. If you don’t have an employer-sponsored retirement account, you may have to do a little extra work to increase your contribution, but it’s still a set-and-forget action.

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Karabaic recalled a big raise she once got: from $30,000 per year to $39,000. “The very first thing I did was log in and raise the contribution to my 401(k) by $4,500 a year,” she said. “Half my raise went into my retirement, and I still felt like I was getting a big raise.” She created a win-win by increasing her discretionary income and bolstering her future financial security.

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Or, you can use your raise to save. If your emergency fund is far from prepared for unexpected expenses, you can give it a boost by funneling your extra funds there. Have a healthy emergency fund already? You may have a different goal in mind, like upgrading your old vehicle or saving for a home.

If you’ve already maxed out your tax-advantaged retirement contributions, you may want to set up some short-term investments. That’s not to say you need to suddenly become a day trader, but maybe you hold your short-term savings in a brokerage account to let it grow for whatever your next rainy day wish might be. Of course, you’ll want to have any debt knocked out and make sure you’re financially stable before taking this route, but at least you know what to do next if and when you reach the end of the more obvious choices for allocating your new funds.

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Leave yourself a little fun money

You might have noticed that Karabaic didn’t drop her entire $9,000 raise into savings. It’s important to keep in mind that not every cent of your raise has to go toward one of the buckets above in order to be valuable to you.

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As we’ve said before, pacing yourself can make meeting financial goals more manageable, but it can also feel frustrating. Everyone likes to see progress, and they like to see it right now, please.

How much you should automatically tuck away versus enjoying is up to you. If you’re working your way out of debt, you might decide to put 75% of your post-tax raise toward your debt payment, 15% toward emergency savings, and 10% toward your fun budget. That 10% may not get you far, depending on the increase, but that extra few bucks per week to use for a coffee date with a friend or a night at the movies could make your journey a lot more enjoyable.

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A little lifestyle creep? Go for it. Enjoy your hard earned money. (Maybe even order some takeout.) But don’t spend that money without a plan, to help ensure you’ll save what truly matters.

Darknet  Lifehacker

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