5 Steps to Take If You Get a Raise This Year

All your hard work has finally paid off and your boss has just informed you that you’ve received a raise effective on your next paycheck. Many people automatically start thinking about how much additional money they’ll be able to spend each month. It’s understandable that you want to use your extra money to improve your life, but makes sure you’re being smart about it.

Don’t assume anything until you see your paycheck. A 5% increase in your annual salary may not necessarily translate to a 5% increase in your paycheck, especially after taxes are withheld from your pay. Avoid making firm plans about how you’re going to spend the additional pay until you receive your first paycheck after the raise. This will give you an idea of the amount of money you’ll actually be able to spend.

Look at your tax withholding. There’s a chance your pay raise could put you in a new tax bracket. You enter your salary and exemptions into the IRS online withholding calculator to determine how much should be withheld from your paycheck. To make changes to your withholding contact your human resources or payroll department to complete a new Form W-4. Failing to adjust your tax withholding could impact your tax return.

Increase your retirement contributions. If you’re not already maxing out your retirement contributions, you can direct your pay increase to your employer-sponsored 401(k). You’ll receive an even bigger benefit from your retirement contributions if your employer matches what you put in. This is a good move especially if you’re already living comfortably on your current salary.

Pay off debt. An increase in your pay is a good opportunity to make a dent in your debt. If you’re currently making the minimum payments can you can’t afford to pay more, the pay increase has come at a perfect time. Once you’ve received your first paycheck and you’ve adjusted your budget based on the new income, determine how much you can afford to put toward your debt. Paying as much as you can to one credit card at a time is the most effective way to pay off your credit card debt. Once you’ve paid off your credit cards, you can move on to your auto loan and your mortgage.

Avoid increasing your monthly expenses. Seeing your paycheck go up by a few hundred dollars or more each month can tempt you into taking on additional expenses. It may not happen at once, but here and there, you increase your cell phone package, take on a new subscription service, or perhaps you buy a more expensive car because you can afford it. Before you know it, you’re spending your entire paycheck and it’s like you never got a raise at all. Be careful about taking on new expenses.

When you receive a salary increase, it’s best to use it in ways that will improve your overall financial standing. Saving and investing the majority of your pay increase is ideal and allocate a small portion of the funds for enjoyment.