Adjusting Your Budget After a Raise
It’s exciting to get a raise, but don’t go spending it all quite yet. In this article, we explore the things you should consider when adjusting your budget after a raise.
Getting a raise is incredibly exciting, especially if it came as a surprise. Your mind may already be racing with all the purchases and lifestyle changes you’d like to make. We get it. It can feel like that money is burning a hole in your pocket before the direct deposit even hits your account.
First of all, congratulations! It’s so fulfilling to have your hard work pay off with a reward like a raise. With that in mind, there are a few things you’ll want to consider before making any rash decisions — or massive purchases. Explore how you should approach adjusting your budget after getting a raise.
Establish an emergency fund.
If you don’t already, your first priority should be to establish an emergency fund that covers 3-6 months of expenses, not income. How much you sock away is a personal decision. However, it’s a good rule of thumb to consider how long it would take you to get a job replacing your income if you were to lose it. Having an emergency fund protects you when those unexpected life events happen, like a medical emergency, a natural disaster, or the loss of your job.
In those events, instead of having to run up a high bill on your credit card, take out a payday loan, or other undesirable options, you can instead dip into your emergency savings. It’s important to only use those savings in the event of an emergency and to work to replace them as soon as possible once you’ve recovered.
Reward yourself, within reason.
Getting a raise is exciting and you deserve to celebrate your hard work! Don’t go buying a brand new car or a huge house, but treat yourself to dinner or a pastry from your favorite bakery. Then, it will be easier to think rationally about building your new budget after celebrating your recent achievement.
If you prefer, you can also celebrate your recent raise by donating a lump sum to your favorite charity or community cause. Something I have always done every time I received a one-time bonus is purchase art. It's incredible how good it feels in the long term. Plus, this is another great way to have an impact, particularly on local artists.
Avoid lifestyle creep and manage debt.
Just because you’re making more doesn’t mean you need to figure out how to spend it all. “Keeping Up with the Joneses” by buying expensive cars or other frivolous items in an attempt to attain a higher social status is never a good idea and can be incredibly dangerous financially.
Instead, take a look at your existing budget. Can you afford to make higher payments on any debt? It’s a good idea to prioritize paying off high-interest loans and debt, such as your credit card. You can also consider increasing your regular payments on your auto loan or mortgage. You’ll save on interest in the long run and will be able to pay off your loan sooner.
It’s important to have a plan for getting your debt under control before making any extravagant lifestyle changes.
Once you’ve covered your minimums, you can look at adjusting your budget from a percentage perspective. For example, if you were to get a 3% raise, you would increase your savings, investments, retirement, donations, and spending lifestyle all by 3%. It’s key to make this change right away after receiving your raise — if you wait, you’re more likely to spend the excess.
Save for your future.
Once you’ve increased debt payments, you should consider saving for your future. If your employer offers retirement matching, be sure to max it out. Contribution matching is like free money — don’t pass this up! Especially after getting a raise, even a 5% employer match can be substantial for saving for retirement. If your income is under $139,000 you can contribute up to $6,000 toward a Roth IRA annually.
After retirement, consider other future goals you may want to save for, such as purchasing a house or sending your kids to college. Calculate how much you can afford to save monthly, then set it on auto-pilot. It’s easier to save money when you don’t have the opportunity to spend it.
Support causes you care about.
After making sure your needs are met, it’s a great idea to consider how extra money in your budget can help support the causes that mean the most to you. Making a direct donation to organizations you care about can have a significant impact on their mission and help them do even more good.
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Cover photo by Ketut Subiyanto from Pexels, first photo by Gary Barnes from Pexels, second photo by Harli Marten from Unsplash.