Buzz
You’ve put in the effort, and now it’s finally happening: Your first paycheck, reflecting the raise you worked so hard to earn, is in your hands. But as anyone who’s ever come into some extra money will tell you, it has a sneaky way of disappearing. One moment, your bank balance is looking great, and the next, it’s back to the usual low number. What happened to all that extra cash?!
(My guess: Online shopping and takeout. It happens to the best of us.)
That’s why, after securing that raise, the next step—once you’ve calmed your nerves—is deciding how to make the most of that extra income you’ve earned. You can’t just leave it to chance and plan to save a bit after enjoying this first paycheck. Instead, you need to give your money purpose and direction.
Automate Your Raise
Before deciding where to allocate your newfound funds, it’s essential to know exactly where they’ll go. “It’s easy to lose track of a small raise,” says personal finance expert and author of A Cat’s Guide to Money, Lillian Karabaic. “When it’s only an extra $60 per paycheck, it feels like that money just slips right through your fingers.”
Her advice is to set up a system that channels your raise toward your financial goals. If you’re not transferring that money to your employer-sponsored retirement account, which would handle it automatically, you’ll need to hide it from yourself to keep from spending it.
“Many employers allow you to divide your paycheck across different accounts using a form from HR,” she explained. “For example, if you received a 3% raise, you can direct 3% of each paycheck into a dedicated savings account.” This account can be used to accumulate funds for your savings target, or it can serve as a temporary holding spot—for instance, if you want to automate payments to your credit card bill from it.
Whatever method you choose, take a few moments now to establish a system that will keep you from being careless with your new money. By setting up direct deposits or creating automatic transfers, you’ll avoid the sometimes-painful “squeeze” of saving, Karabaic advises.
Where to Allocate Your Extra Funds
Now that you’ve decided to be intentional about where your extra income goes, rather than leaving it to chance, you have three main options for how to use this new money.
One option is to apply it toward paying off debt. Whether it’s student loans, credit card balances, or outstanding medical bills, putting your extra income toward these can help you reduce them faster.
If you go this route, prioritize paying off the debt with the highest interest rate. For instance, purely hypothetically, if you have credit card debt at 18%, a car loan at 4%, and student loans at 3%, it doesn’t make sense to focus on extra student loan payments when your credit card debt is eroding your raise with high-interest charges.
Start by focusing on clearing debts with interest rates of 5% or more, then work your way down. And keep in mind that if you’re carrying significant debt, this is more of a long-term journey than a quick fix.
If you’re debt-free—or even if you’re not—you might want to direct some of your new income toward your retirement savings. This is often the simplest option because you can easily adjust the percentage of your paycheck that goes into your 401(k) each pay period. If you don’t have an employer-sponsored retirement plan, you might need to put in a bit more effort to increase your contributions, but it’s still a set-and-forget strategy.
Karabaic shared a story about a significant raise she once received: from $30,000 annually to $39,000. “The very first thing I did was log in and increase my 401(k) contribution by $4,500 a year,” she explained. “Half of my raise went straight into my retirement, and I still felt like I was getting a nice bump in pay.” By doing this, she boosted her future financial security while also increasing her discretionary income.
Alternatively, you can use your raise to save. If your emergency fund isn’t quite up to par for unexpected expenses, this is a perfect opportunity to grow it. Already have a solid emergency fund? Perhaps you have other goals in mind, like upgrading your old car or saving for a down payment on a house.
If you’ve maxed out your tax-advantaged retirement contributions, setting up short-term investments might be a smart move. You don’t have to dive into day trading, but you could park your short-term savings in a brokerage account to let it grow for future needs. Of course, make sure any outstanding debt is paid off and that you’re financially stable before taking this step. But once you’ve tackled the obvious uses for your funds, this is a great next move.
Leave yourself a little fun money
You may have noticed that Karabaic didn’t put her entire $9,000 raise into savings. It’s crucial to remember that not every dollar of your raise needs to go toward one of the above categories to still hold value for you.
As we’ve mentioned before, pacing yourself can make achieving financial goals feel more manageable, but it can also be a bit frustrating. Everyone loves to see progress, and they want to see it right away, please.
How much you decide to save versus spend is entirely up to you. If you’re working on paying off debt, you might choose to allocate 75% of your post-tax raise toward debt repayment, 15% for emergency savings, and 10% for your fun budget. That 10% might not go far depending on the raise amount, but having a few extra bucks for a coffee date or a movie night can make the whole process more enjoyable.
A little lifestyle creep? Go for it. Treat yourself to the fruits of your hard work. (Maybe even get some takeout.) But don’t spend that money without a plan, so you can still save what truly matters in the long run.
