Did you get a raise? Congratulations!
Whether you work at a salaried job, or you’ve crafted self-employment to fit your lifestyle outside of the traditional career track, you’re going to see a bump in your compensation at some point. It’s cause for celebration. It also invites preparation.
If you're eyeing the future while trying to take care of the here and now, there are steps you can take after getting a raise that will give you an edge on your finances. You want to be able to enjoy the pay hike while also making your money work for you. After all, you’re investing in you.
A raise is an accomplishment. It can be an acknowledgement of negotiation or plain hard work. Now that you’ve got it and want to determine how to use it, consider your goals. Targets provide you with an opportunity to focus on getting what you want. A financial plan, which is a comprehensive picture of your short-, medium- and long-term financial goals, will help get you there.
Take some time before you spend
Before making any spending or saving decisions, wait until you actually receive the raise. That way you can calculate exactly how much extra you have as take-home pay.
This step accomplishes two things: It will give you time to set or recalibrate your budget and financial targets; and it will also show you how much may be going to expenses you may not have otherwise considered, such as taxes (what if the raise pushes you into a higher tax bracket?) or government programs such as the Canada Pension Plan if you’re self-employed. Your raise can help to bring some expenses that otherwise live in the shadows to light.
By giving it some time, even just a few paycheques, you can calculate where you want your raise to go without leaping into some major splurges and potentially ratcheting up monthly payments. Also, as the current climate of rising inflation eats into every dollar you spend, eroding your purchasing power and impacting everything from rent or mortgage payments to food and entertainment costs, you may see some of your raise being silently eaten away.
Now that you’re giving yourself some breathing room, consider this an opportunity to:
- Revisit your monthly budget or get one going if you don’t have one.
- Add more to your savings for longer-term goals, such as a vacation, wedding, car, home or planning a family, and steer money into an emergency fund for unforeseen financial problems.
- Aim to get your highest interest debt down, not necessarily at one go, but by chipping away at it more diligently with some of your increased wealth.
- Start putting money toward a retirement plan, or adding to it, which is part of a sound, long-term investment strategy.
All these suggestions take discipline, but a well-considered plan gives you room to accomplish what you want now and later.
Reward yourself but beware of lifestyle creep
It’s human nature to want to live in the moment. After getting a raise, increasing your standard of living is tempting, especially as a reward for the hard work that got you that raise. But sticking to the lifestyle you already have and forestalling major purchases can set you up to have a healthy financial future.
Statistics Canada data shows that, while millennials generally have higher incomes than the generation before them, they are also carrying more debt, primarily in the form of mortgages. So, heading down a slippery slope of spending too much too soon can lock you into further debt, which might be particularly worrisome if interest rates go up.
Budgeting can help you live within your means. A good tip is to reward yourself with something manageable and fun, a one-time purchase or experience — whether that’s a new outfit, gadget or weekend getaway — that does not tie you down by adding to your debt or filling you with remorse down the road.
Reach out to a financial expert
Finally, the best way to get a handle on what you can do with your raise that is going to provide the best bang for your new bucks is by reaching out to a Servus wealth advisor, who has the experience and tools to help get you where you want to go in the long term.