How to Make the Most Out of a Pay Raise

Without careful planning, your spending could rise along with your salary.


Getting a pay raise is one of the most anticipated events you'll face as an employee, and while we all feel we deserve one each year, it's not something that most of us are awarded on a regular basis, especially in recent years when pay freezes have been more common.

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That makes it more important than ever to make the most out of a pay raise when you get one. Many people find they automatically start spending more once they are given more. But if we're going to grow our net worth over time, we need to ensure that we continue to live within our means. So if you want to avoid having your spending creep up along with your income, then take note of these five tips, which will help you maximize your next raise:

1. Work out what your net pay will be each month. You won't be able to figure out what to do with your pay increase until you first know exactly what you'll be receiving after taxes. For instance, an annual $3,000 pay raise doesn't necessarily translate to an extra $250 in wages each month given that a certain amount may be withheld from you in taxes. So you'll have to work out what that net amount will be. If you're not sure what this figure is, then wait until your new pay comes in, and deduct your original pay from this amount to work out the difference.

2. Start creating a six-month ‘job cushion.’ What would you do if you suddenly lost your job? While you just got a pay raise, it's natural to shrug away the possibility that your job may be in danger anytime soon. But do think about keeping at least six months' worth of wages set aside in case the worst should happen. If the unthinkable happens sometime in the future, your cushion will help you buy six months to focus on getting a new job.

3. Use the money to clear debts. If you've got debt hanging over you that you've been paying interest on, then you should always use your pay raise to help whittle it down and to get rid of it completely as soon as you can. Create and execute a debt repayment plan and you'll be in a much stronger financial position before too long.

4. Set up an automatic transfer each month to funnel your additional income into a savings account. If you don't have a savings account yet, then this is the perfect opportunity to open one. Check out those offered by an online bank, as they tend to have higher yields. There is no better time than the present to get started. What you have is ‘found money’ that can go a long way when used wisely.

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5. Ask yourself how that extra money could make a difference to you every month. If you've already made a lot of headway with your savings, then you may want to do something else with that additional disposable income. How about investing in the stock market instead? If you're ready to take the next step and open an investment account, then choose an affordable broker with great investment options to house your new funds. Or maybe you could pay for a course on a subject you’d love to learn more about. It could be anything: what would work for you?

There is a lot you can do to ensure that your pay raise doesn’t just get frittered away each month. Of course, if you're in great financial shape, and you're saving money and have no debts, then you may want to consider using some of that extra income to fund something enjoyable, such as a family vacation or a new electronic gadget to play with. When you've worked hard for your money, there's nothing wrong with spending a little for fun!

Silicon Valley Blogger is a full time blogger and online entrepreneur who writes for The Digerati Life and The Smarter Wallet sites that cover general personal finance topics ranging from investing and saving to credit and debt management.