First off, congratulations, you got yourself a raise! I’ve no doubt that you’re like me and you work your ass off at your profession and this raise is well deserved. Whether it’s a promotion, an actual raise or a cost of living increase, you have cause to celebrate and I fully support that. Have a celebratory dinner, take a trip, buy some thing. Whatever floats ones boat during this time, do it, as long as it is within reason and within budget. Rewarding yourself is vitally important to keep yourself motivated, revel in this moment! Now, let’s get down to business.
I Got A Raise…Now What?
You’re making more money, absolutely cause for celebration so you’ve celebrated. Now that you’ve got your head back on your shoulders and you’ve floated back to the ground, what do you do with this extra money? Well, you’ve got lots of options don’t you? You can blow it all on stuff, you can save it for your children’s college, pay off credit card debt, a car, pay extra toward your mortgage. You can donate it, you can do whatever you choose with this money, it’s yours.
Before we get to the benefits and possible drawbacks of some of those above points, let me throw something your way that I believe to be truth.
I believe that people tend to get by on whatever income they’re currently making.
This is important so I want to make sure it makes sense. I’ll use myself as an example. When I was younger, just beginning my illustrious career in the service industry (a hint of sarcasm there, yes, but let it be known this industry has taken very good care of me) I climbed the ranks pretty quickly. With each subsequent pay raise I received, my lifestyle increased in direct proportion. That is to say, the more money I made the more money I spent. Whatever I was making, because I was spending the same amount, I was just getting by.
We’ve all heard the stories and read the stats about how a disproportionate amount of lottery winners end up exactly where they began, or worse off, just a few years after their windfalls. Music icons, movie stars and sports players ending up broke when they should have had millions in the bank and been set for life. There are a plethora of examples to illustrate the point. Most people live a lifestyle at or above their income.
So, what should I do with my raise?
Pay Off Credit Card Debt
There are people who may disagree with me on this, but I am an advocate of paying off credit cards first and foremost, sometimes even before saving money. Let’s assume you’ve got a budget set up and you are following it. You’ve got a buffer in your checking account so if you accidentally spend twenty dollars more on groceries you’re not knocking on the door of bankruptcy. You’ve got a few thousand dollars in credit card debt that is amassing interest on a monthly basis to the tune of 18 – 30 percent. That means you’re paying $45 – $75 per month in interest alone! Expect your minimum payment for this to be around $70 – $100 per month. The breakdown:
Interest Rate: 18% – 30%
Monthly Interest: $45 – $75
Monthly Principal: $25
Monthly Minimum Payment: $70 – $100
Here is my thinking: Why put new, extra money from this raise in to savings earning a few percentage points when I could apply this same money to a financial area that is costing me a percentage well in to double digits? Put all available money toward this credit card, get it paid off as soon as humanly possible and here are the advantages you’ll see:
Elimination of the monthly interest.
Elimination of the entire debt payment.
An increase of your net income (after monthly expenses) of the amount of the credit card payment PLUS the amount of your raise!
Immense satisfaction of getting rid of this debt.
Many people will say that you should save before paying off debt in case of an emergency, that way if something does arise you won’t have to dip in to credit cards to pay for it. I do see the logic in this but I am not a fan. The longer credit card debt is around, the more money it costs. If, while in the process of paying the card off, an emergency does come up, say your car needs new tires suddenly… You don’t have savings so you have to use a credit card. The same card you’ve been paying off. You’re no worse off than you were prior to deciding to pay your card off. You’re just further along with hopefully less debt, or worst case scenario you’re back where you started but with new tires.
You’ve got some extra cash each month because of your raise. One option of dealing with this is to put part or all of it in to savings. If you’re totally hardcore and want to put all of this money in to a savings account, retirement account or college fund, go for it! If you want to set part of it aside and enjoy the rest, good too. Going either of these routes, or with any sort of savings plan, I am a huge proponent of automating the transfer of funds in to savings. Every bank I have ever been a part of has automatic payment / transfer options to take the thinking and remembering out of saving. This is advantageous in every way. It assures that you’ll have steady, predictable savings that you never have to think about.
Pay Off Your Car
Getting a new (or a new used) car is always exciting! Know what’s not exciting? The car payments. They become really burdensome after a while and eliminating this payment from your monthly schedule is immensely gratifying and good for the bottom line of your household. Many of the same things apply here, you’ll save on interest over time and you’ll eventually lower your monthly overhead by paying off your car more quickly.
Pay Extra Toward Your Mortgage
There are so many mortgage calculators available online that can tell you what paying extra toward your home will do for you in both length of the loan and interest saved. I won’t get in to the details because the calculators illustrate it with numbers better than I can with words. The potential savings here are tens of thousands of dollars over time.
If you gain one thing from this post, let it be this: If you can maintain your current lifestyle when you get a raise you’ll be exponentially better off, financially, than if you just increase your spending. Over time, I promise you, it will be worth it.
As always, I invite comments and emails about what you’ve done or what you will do when you get a raise!
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