You received a new raise or promotion for all your hard work. Now it’s time to make that new raise work for you.
We’re usually told to plan for financial emergencies, like losing a job or a source of income. But it’s also a smart move to plan your finances in the event of a raise or promotion. And this year, with 64% of companies planning to increase raises to meet rising inflation costs and to help with employee retention, it pays to think about what to do when your income increases.
By planning for your new raise, you’ll be managing your money with thought and care. You won’t make the mistake of spending it all in one place. And you’ll feel secure and confident knowing where your money is going.
Here are smart money moves you should make when you get a new raise or bonus.
Determine your financial goals
First things first, make sure that your raise is aligned with your personal finance goals.
If you haven’t defined your financial goals just yet, then take some time to think about what you would like to achieve in the short and long term.
Examples of financial goals can include:
- Paying off credit card debt
- Saving money for a dream vacation
- Putting away money for your kid’s college fund
- Saving money to start your own business
Personal finance goals help you be more purposeful about your spending and saving. You’ll be less likely to waste money on impulse buys, and you’ll feel more motivated to pay off debt or increase your savings, knowing that it’s helping you reach an important goal.
Invest in your skills
Whether you’re a freelancer, entrepreneur, or corporate employee, it’s essential that you regularly seek out new learning opportunities and develop your skills.
Investing in your skills ensures that you stay competitive in your field. You don’t want to be the one falling behind when everyone else is developing skills that will give them an advantage.
So how do you know which skills to invest in?
First, take a look at your dream jobs. What kind of skills and experiences do you need to get that role? Don’t worry if the role seems way out of your grasp. The idea is to start investing in your skills now, so that they can grow with time and put you in a better position for your dream job later.
So if you're looking for leadership roles, what skills do you need to fulfill those responsibilities? Maybe it’s signing up for public speaking classes. Or working with an executive coach. Or brushing up on foreign your language skills.
Then, use your additional income to sign up for those classes and coaching sessions.
And the best part about investing in your skills? You’ll see big improvements in your skills in the short-term and you’ll benefit from the learning opportunities in the long term.
Invest in your tools and office supplies
With a new raise or promotion, you can invest in better office tools and supplies.
Your tools and office supplies help you do your job more effectively. Without the right tools by your side, you can spend an unnecessary amount of time trying to get things done. The right tools help you work smarter, not harder.
If you recently received a promotion, then it’s an ideal time to elevate your everyday tools and project an image of professionalism. An elegant notebook and classic fountain pen can express your style and make you look and feel more confident in your new role.
Pay off debt using the snowball method
Another option for your new raise or promotion is to use it toward paying off your debt.
Trying to minimize debt can often feel like a Sisyphean effort. You’re making a big payment every month, but without seeing a significant change in your balance.
If you’re feeling unmotivated to pay off your debt, one thing you can do is to use the snowball payment method. The snowball method is a debt payment plan in which you pay off the smallest debt first.
For example, if you’re debating between paying off a credit card balance that is $2,000 and another one that is $5,000, using the snowball method, you would pay off the smaller credit card balance of $2,000 first.
The prevailing financial advice has been to pay off debt with the highest interest rate first. But the snowball method is a good strategy for those who are motivated by small, short-term wins or those who are trying to develop better money habits. Because you’d be paying off the smallest debt first, you’d probably see results and put a dent in your debt relatively quickly. And once that debt has been cleared, you’d be in a better mindset to eliminate debt with a higher interest rate.
Create an emergency fund
It’s always a smart move to add money to your emergency fund.
Don’t have an emergency fund? It’s not too late to start building one.
No one likes to think about worst case scenarios, but it’s important to be prepared. You never know when emergencies like office layoffs or exorbitant medical expenses will arise. An emergency fund will help you stay afloat while you find higher ground.
So how much money should you squirrel away for emergencies?
According to this Business Insider article, you should have “three to six months worth of expenses in a money market account or high-yield savings account.”
But why a money market or high-yield savings account? If you put away money in a checking account, the money would just sit there. At least with a high-yield savings account, your money would be earning interest, and doing something for you.
So if you’re trying to calculate how much money to save for your emergency fund, take a look at your current monthly expenses. You’ll want to make sure that you have enough for recurring expenses like rent, utilities, groceries, monthly credit card payments, etc. You’ll also want to take into account potential expenses like health insurance.
Set up an automatic transfer so that a portion of your paycheck is going into your emergency savings account each month. This way, you won’t be tempted to dip into this fund.
Whether you invest your new raise in your professional development or emergency fund, you’ll be setting yourself up for a strong future.
Written by JiJi Lee.
