It’s been a rough couple years for employees. Many lost their jobs, and those who kept their jobs were unlikely to receive raises and bonuses. However, the economy is on the mend and many employers are finally able to offer raises. If you’re among the lucky recipients, you might be tempted to resume your prior spending levels, but I’m about to argue that you shouldn’t do that. Instead, use this as an opportunity to do one of the following. After all, you’ve survived this long without the extra money, you can keep doing it.
Pay Down Debt
If you received a pay cut, or couldn’t cut spending enough to avoid debt without a raise, then use the new money to pay down any credit card or other debt you’ve built up in the last two years. Since you weren’t used to having the money, you won’t miss it. If you use it to pay down debt, you’ll even wind up ahead of where you started because you’ll pay less interest and move through your debt faster.
Rebuild Your Emergency Fund
If you had an emergency fund, it may be depleted at this point, especially if you received a pay cut. If you’ve gotten used to spending less and aren’t creating new debt, then use the raise to rebuild the emergency fund. Another emergency could happen at any time, so it’s important to restore it as much as possible.
Boost Retirement Savings
Many employers cut their 401K matches last year, but are now restoring them. If you reduced or stopped contributing to your retirement, use your raise to start contributing again. Especially if your employer is resuming matching funds. If you don’t get matching funds, consider using the raise to open a Roth IRA or traditional IRA.
Replace Worn Out Appliances
Okay, this is a spending one, but if you have an appliance that is due for replacement, now is the time to do it. Some states have already run their Cash for Appliances programs, but other states are just ramping up. If your state is in the latter group, wait until it starts and then use your raise to replace your appliance and claim your rebate. While you’re at it, check for other rebates from your local utility. You could cover a significant portion of the cost by combining rebates.
Make Delayed Home Repairs
If you delayed any home maintenance because money was tight, now is the time to do it. Continuing to delay maintenance could lead to higher replacement costs later when it’s an emergency. Spring and summer are on the way, which is the perfect time for home maintenance.
Set New Savings and Investing Goals
You’ve already missed part of the new bull market, but there’s still quite a way to go. If you’ve already funded your retirement and rebuilt your emergency fund, consider investing in a regular brokerage account, starting a CD ladder, or increasing your general savings. If you really need a vacation, then you can set a savings goal for that and set aside your extra pay for that.
Of course, you can also go out to a nice dinner with your new raise, but don’t let it become a habit again. There’s no reason to give up your newfound frugal ways because you have more income. Have a little treat every now and then, but otherwise stick to your goals. You learned to live without the money once. You can continue to do so.
Are you getting a raise? If so, what do you plan to do with it?