3 Ways I’ll Spend My Annual Raise

It’s annual review time at my job, which also (hopefully) means raise time. Before I even know how much of a raise I’m being rewarded, I am putting a game plan in place to make sure that whatever increase I receive helps me achieve my bigger financial goals. The average annual raise falls in the two to four percent range, which would translate to very little increase to my actual paycheck, quite frankly. So instead of just absorbing the extra dollars into my everyday spending, here’s my plan:

1. Increase my 401k contribution by 1%. Before I even see how my raise affects my regular paycheck, I’m sending 1% of it straight to retirement savings. The rule of thumb is to save at least ten percent of your income toward retirement, more if you had some non-saving years in there. I had a couple non-saving years when I was starting my business, so I have some catching up to do. The best way to do that is with “new” money that I won’t even miss when my contribution goes up.

2. Increase my debt payments by half of my paycheck increase. When I receive my first post-raise check (with the extra 1% 401k contribution already taken out), I’ll figure out exactly how much my monthly take-home pay will be affected, then I’ll divide it by 2 and increase my car payment by that amount. So if my check goes up $150 per month, I’m going to pay an extra $75 toward my car loan. If you have credit card debt you’re still paying down, then the extra money should go there. This is the best way to accelerate toward becoming debt-free, again with money I am already living without.

3. Allocate the rest toward something fun. For me, I’m simply going to increase my automatic savings deposit by the other half of my paycheck increase, since that’s money I’m saving for a big vacation next year. If you’d rather have instant gratification, maybe that extra could go toward a monthly massage or regular mani/pedis. No matter what, the best way to really feel the reward of your raise is to be deliberate with how you’re going to spend it. Otherwise, the incremental increase to your income could easily be lost in the sea of impulse spending.

And if I get a bonus? (fingers crossed!) I’ll do the same thing I do when I receive a tax refund: half will go into savings and the other half I will use to do something fun, whether it’s buying something that I want but can’t afford right away like a designer handbag or piece of furniture, or upgrading to a VIP experience while traveling or attending an event.

Since annual raises don’t usually offer the kind of life-changing income boosts that new jobs often deliver, it’s important to plan ahead to make sure the increase still has an impact. Be purposeful with the incremental increase and you could see a huge difference over time.