The only thing better than a payday is a payday that comes with a bigger paycheck. They might not happen often, so when a raise comes your way, it’s hard to not get a little excited.
With that excitement often comes an urge to spend more, even if you don’t need to. This is sometimes called lifestyle inflation — people spend more as they earn more, while failing to re-evaluate their savings and other financial goals. So when you get that occasional bump in income, take some time to decide what you should do with it. Here are some ideas for making the most out of a raise.
1. Pretend You Didn’t Get It
Do you want to save more? One of the easiest ways to do that is to make more money. At least, it tends to be easier than the alternative: spending less. If your expenses stay about the same but your income goes up, keep the same budget you had before, and push the leftover money into a savings account.
Getting a raise is often a good time to revisit your budget so you can identify any regular costs you may want to cut, like a subscription you’re not using or insurance premium you could reduce by modifying your coverage or changing insurers. Reducing your expenses and increasing your income can significantly improve your financial stability if you put your surplus toward an emergency fund or retirement plan.
2. Do Something You’ve Been Putting Off
Think about ways you’ve wanted to improve your well-being but couldn’t previously afford. This could be anything from an overdue home improvement to a long-desired treat, and a bit of extra monthly income could help you get it. Sure, replacing your car’s tires may not be as exciting as getting a new TV, but try to think of purchases that could help you save money in the long run before splurging on something you might not need for a while. Ideally, you could do a little bit of both as your higher paychecks continue to roll in.
3. Pay Off More Debt
Most people in debt have something in common: They want to get out of it. A pay raise can help you accelerate that process. Say you have $2,000 of credit card debt with a 15% APR (about the average credit card interest rate), and you’re currently paying $100 a month to get rid of it. If you use your raise to add another $100 and bump your monthly payment to $200, you’ll be out of debt roughly a year sooner and save about $166 in interest. You can use our credit card payoff calculator to see how higher payments can shorten your debt-free timeline and save you money on your debt.
It’s your raise — do with it what you want — and remember you don’t have to do just one thing with it. You can save a little, spend a little and throw a little at your debt, because these can all be positive moves. If you’re trying to improve your credit, remember that paying down debt (credit card debt in particular) can help your credit scores. You can see how credit card spending affects your scores with the two free credit scores you get once a month on Credit.com.
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