A raise represents a welcome addition to your income, but it can also come with some pitfalls. You may be tempted celebrate by splurging on something you or the family have wanted. While a small purchase may be in order, it’s important to remember that the money will be doled out across multiple pay periods. You also won’t receive the entire $5,000 since taxes will take a percentage of each dollar.
Take Home Pay
Take stock of your current financial situation and figure out how many dollars more you’ll be taking home each pay period. You may also have to make adjustments to your withholdings your IRS W-4 form. Claiming too much in withholdings will net a large refund at the end of the year, but it can also bring unwelcome attention from the IRS. Claiming too little in withholdings can leave you owing a significant amount of money to the IRS that you’re ill-equipped to pay.
If you have credit card debt or a car loan, use the extra money each pay period to pay it down. It’s especially important if you have high-interest credit cards or long-term debt. It will also work to increase or maintain your credit rating.
A raise is a great way to build on an existing emergency fund or start one. You’ll have the needed funds if there’s a job loss, unexpected medical bills, or a major appliance needs to be replaced. Keep the money in a separate savings account so you won’t be tempted to spend it. Financial advisors recommend having enough money in an emergency fund to cover living expenses for 3 to 6 months.
It’s never too early to think about retirement. Contributing even 1 percent of your raise to retirement can make a big difference. Consider making it an automatic deduction from your pay check. If your employer matches your contributions, definitely take advantage of it.
It’s okay to set aside a little money to treat yourself or the family and enjoy your success. It’s your reward for hard work. Just keep it small and don’t go overboard. A treat doesn’t have to cost a fortune to be appreciated and savored.
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