Congratulations! Here’s how you can adjust your budget when you get a raise to keep your finances in order when the celebration is done
Getting a raise can be such a gift and a refreshing breath of air, especially when you’ve been on a tight budget. Once the celebration is done, there are some big decisions about allocating the money. Do you save up for something big, pay off debt, invest? The best way to use your new increased income is a combination of these options that best suits your family’s needs and priorities.
Here’s what to do when you get a raise and how to make the most of it, especially when managing a single-income household.
Table of Contents
Step 1: Assess Your Budget And Financial Situation
Your next step forward is best started by taking a step back. Look at your current monthly budget and see if there are areas you struggle to meet. Look at your savings account, house projects, retirement investments, debt, and any upcoming needs. It’s important to be strategic so you don’t waste your newfound extra income. Here are some helpful questions.
- Do You Have Savings For An Emergency? Your savings account is your financial lifeline to paying any surprise expenses. It helps you stay afloat if your car were to break down, you need an Emergency Room visit, or you lose your job. How much do you have in your savings account and is it enough to pay for surprise expenses over the next year?
- How Much Debt Do You Have? Medical bills, student loans, phone payments, car loans, and mortgages are all different forms of debt. Monthly debt payments can really eat up your monthly income in a hurry. Are there any debts you are close to paying off or that you would like to reduce?
- Do You Contribute To Your Retirement? If you’re offered a 401K through your work are you contributing to it? If you aren’t do you have a plan to fund your retirement in the future? If retirement feels far off and you’re unsure how saving for it works, check out this guide to 401Ks from Dave Ramsey.
- Are There Any Upcoming Events? Do you plan to have a baby, get surgery, or need a new car in the next year? If so, consider how much of the raise will be needed to cover those. Try to only list necessary events, not fun vacations or house projects that “would be nice” to complete.
Step 2: Assess Your Financial Goals
Are you trying to follow a specific program like Dave Ramsey’s Baby Steps? Are you trying to save up for a house or adoption? Take time to assess what is most important to you and your family at this time. Be honest with yourself and your spending over the last year to determine if your spending activity has been meeting those goals. If they have, how can you enhance that with more money? If they haven’t is there a reason for it? Is there another goal that you may not have considered?
Make sure to also discuss your dedication to your goals with your spouse. If only one partner is strongly dedicated, it could cause tension later. Also, consider how you want your lifestyle to look with this new raise. Will you need to keep penny-pinching every expense or will there be room for some lifestyle creep in terms of an increased grocery budget or “fun money” each month?
Step 3: Adjust Your Budget
Now it’s time to put your plan into action! Make a written budget by hand, app, or spreadsheet, and allocate your new money toward each area that best fits your financial goals. Make sure to double-check your math to ensure that all your additions don’t add up to more than your new income. It’s important to also check your first new pay stubs to see if any taxes or withholdings have changed.
Step 4: Stick To It and Reassess Often
You’ve put in the hard work of determining goals, making choices, and creating a new budget. Now you just need to stick to the plan and make it happen! You and your spouse should stay on the same page and continue to check in frequently on spending habits to ensure the budget is working. This is probably best done monthly but could be done quarterly if you’re a well-seasoned budgeter. Don’t be afraid to make adjustments as needed for holidays, inflation, etc.
Major Pitfalls To Avoid When You Get A Raise
Getting a raise is exciting! If you get too caught up in the excitement, however, you may find yourself falling for one of these two major pitfalls. Try your best to avoid these. They can be especially difficult to avoid if you have friends, or family, or follow social media accounts that don’t encourage wise spending habits.
- Lifestyle Creep: Lifestyle creep is when the cost of your lifestyle creeps up on you without realizing it. It starts by eating out more, signing up for a subscription service here and there, or pressing “add to cart” a couple more times than you used to. Before you know it, your raise is getting eaten up by unnecessary purchases that didn’t benefit your financial goals.
- Getting Lazy: If you get lazy about your budget, your goals, or your determination to your goals you’ll find yourself in a similar predicament to the “lifestyle creep” above. You’ll be disorganized and spending money on events, projects, or trips that didn’t benefit your family long term and you won’t meet your goals.
Conclusion
Congratulations! This raise is going to help your family in so many ways. If you are diligent about making goals and sticking to the plan you’ll be in a great place! The ultimate goal is to have your income be more than your spending so you have wiggle room for savings, surprise expenses, and your future. Take time to celebrate this breath of fresh air but then get back to business. You can do this, I believe in you!
You May Also Like: