Have you ever had a job where your salary is enough to meet your needs? Have you gotten a raise because you’re awesome.… and then had no idea what to do with all that extra money?
I’m in this exact boat after I got my new job. It came with a hefty 10% raise! My previous salary was more than enough to meet my basic needs and then some.….… and now they’re giving me more!? To do a job I love? Ultimate win!
Now, this post assumes you have no debt. If you do have some debt, that’s fine as long as you’re actively working to pay it off or have a justified reason to pay it off slowly (very low interest rates or opportunity costs come to mind). If you’re actively working on paying off your debt, funnel your raise straight into the debt to accelerate the payoff time and save some dineros on interest.
The answer is a bit more complicated if you do have some debt that you don’t want to pay off early — like a mortgage or .05% car loan. If you’re not already maxing out all of your pre-tax retirement accounts, bump up your contributions equivalent to the amount of your raise. That way, you’re saving more but your paycheck will still be roughly the same. This is also an excellent way to avoid lifestyle creep. You can’t spend the extra money coming in if you can’t see it!
I’m at the point where I’m maxing my 401(k) and Roth IRA, but I haven’t yet maxed out my HSA. My first order of business was to bump up my HSA contributions to max that out. $3,400/12 = $283.33 per month, or $141.66/check. I set that during the open enrollment window, so I am all set to max that out. I didn’t even have to do the math on that one — my employer offered a handy button that calculated it out for you! I expect my company to put in some money (last year was $700), but maybe not as much as last year due to current economic conditions.
So, I’ve got no debt, I’m maxing out my retirement accounts, and I still have money left over. What am I going to do ?
Trip to the Bahamas? Maybe a new car? How about a shopping spree in New York?
Most of the leftover money will be going towards my house down payment fund. The more money I can save up before I start looking, the more options I have. I will be getting a VA Loan so I don’t have to do 20% down, and my company will be covering the closing costs if I use their network of people.
The rest of it will go into a savings account to save up for a new car. My car is 12 years old, has over 150k miles, and is still running great; but I would like to be prepared for the future in which it dies or gets murdered in a horribly graphic accident.
|Est. Monthly Taxes:||$1,180||$1,300|
That 10% raise translates directly into $500 extra a month (before taxes). So it’d be easy to say, oh, $400 goes into the house fund, and $100 into the car fund. Done.
But, since I’m also moving, that means I need to take a closer look at my budget and see if it needs any revising. As a matter of fact, my budget needs a LOT of revision! I’ve been tracking my monthly spending for the last three years, so I will be using real numbers in my budget. If you don’t track your spending, start immediately! I use Mint.com and a spreadsheet to track my budget, but others find Personal Capital or YNAB fits them better. Whatever works best for you!
|Insurance (Rent, Health, Car):||$115||$115||$0|
Bottom line, I’ll have at least an extra $800 in my pocket a month
to blow on hookers and cocaine to allocate to savings. If you include the [ridiculously] inflated rent I was paying the last month on my last lease, I’ll have $1,500 to save! For these purposes, I’m going to use the $800.
So, each month on the first, I pay my rent and phone bill. Maybe buy some more food, maybe fill the car up with gas. My first paycheck of the month comes in. Buy some more stuff, pay off my credit card bill. My second paycheck comes in. I have $800 extra in my account. $500 of that will be transferred to my house down payment fund. $300 will go into my new car fund. These are also the absolute minimum numbers I’ll be transferring over. I am thinking I will be able to save much more than that (in addition to maxing out all the retirement accounts), especially since I will be getting a bit of money during Christmas and I won’t have to buy anyone any more presents for a while.
It will take a while to save up any significant amount, but I would rather be paying myself money proactively than pay someone else for it with interest. My house down payment fund will be boosted by my bonus check and what is leftover from when I tried to buy a house in the spring.
So there you have it — how to put a raise to good use!
How do you put your raises to good use? What’s been your best raise in your career?