It’s Monday morning and before you’ve even had your 9am coffee, your boss has already summoned you to their office. “What could this be about,” you wonder.
As you anxiously stroll to their office, you start thinking about what you could’ve done wrong. You walk in, sit down and eagerly wait for them to start talking.
But it’s not a reprimand they’re giving – it’s a raise. You’ve done such a good job over the past few months, they’ve decided to give you a raise. After the hugs and texts to your significant other, you start daydreaming what you should do with it. A trip to Barcelona? A new suit? Or maybe finally moving to that swanky downtown loft you’ve been dreaming about?
Hang on there. Yes, getting a raise is good news, but it doesn’t give you an excuse to splurge. It can be a great opportunity to finally get ahead financially. Here are our best tips on what to do with your new raise:
Increase your retirement contribution
If you’re not saving enough for retirement, a raise is the perfect chance to start. If you got a 5% raise, add an extra 1-2% to your retirement savings. Doing this as soon as you get the raise is best, so you won’t miss the money before it hits your pay cheque.
Try to set up your retirement accounts to be automatic so you don’t have to rely on your willpower to transfer money every month. By automating your retirement, you’ll create a foolproof system to grow your nest egg.
Struggling to decide how to save for retirement? Talk to a financial planner or advisor about what you should do and make sure they’re credentialed.
Start a savings account
Most people keep all their money in a current or checking account, where your rainy day fund and your everyday spending money gets lumped into one account. Now that you’ve got a raise, create a savings account with your new found money.
Start a separate saving account, either at the same bank or at a different location. Then, create automatic transfers from your pay cheque to your savings account. You can start a little bit at a time or do a big lump transfer if you’re getting a yearly bonus.
Promise yourself you’ll only use the money for true emergencies, like a last-minute flight to a funeral or paying off a speeding ticket.
Pay off debt
Once you’ve got a modest savings account, you should consider using your new income to pay off debt. Rank your debt from smallest to largest and pay off as much of the smallest as you can afford. Then, when that debt is paid entirely, apply that monthly payment to your new smallest balance.
If you’ve got high-interest debt, like credit cards, consider paying those off first. The larger the interest rate, the more money you’ll spend every month on repaying the loan.
Save for a short term goal
We’ve all got short-term goals we want to reach: fix that annoying sound coming from our car, replace old furniture and finally go on that vacation.
It’s ok to use some of your raise to splurge on something you really want. Give yourself a set limit, like 10% of your raise, to put toward something fun. If you splurge a little on something you want, you’ll still get to enjoy the rewards of your hard work without being totally irresponsible.
Save for a long term goal
If you’re renting, you might often find yourself dreaming of owning your own place. No annoying downstairs neighbours, no landlord dropping in unexpectedly – just your private sanctuary.
However, saving for a down payment on a house can be a challenge. But not for you – you just got a raise. Look at how much you have and compare it to how much you’d need to buy your own place. With a little careful planning, your new salary could be enough to help you become a homeowner.
The bottom line
Before you go out and buy a bottle of Dom Perignon to celebrate, take a few days to think about what you really want to do with your new raise. Don’t let your emotions take hold – make a list of what you should do and what you want to and come up with a compromise. Yes, you can buy a new couch, but maybe you should also pay off that credit card bill.
Getting a raise is exciting, but most people end up increasing their living expenses and then feel just as broke as they did earlier. Be responsible now and you’ll be thanking yourself later.