How to Use a Pay Raise Responsibly

By Tracey Suhr

Getting called into the boss’ office for the first time can feel a little reminiscent of getting called into the principal’s office. You immediately start sweating and wondering what you did wrong. But just like the principal’s office, it’s not always bad news. In fact, sometimes it’s the best news of all: you just got a raise. Congrats! Take yourself out for a celebratory dinner and maybe even splurge on brunch this weekend. But come Monday morning, it’s time to get down to business and determine how to use your raise. 

You could just enjoy the extra cash coming into your checking account, yes. But, that little financial angel on your shoulder might also nag you about being smarter with that money. Unfortunately, most high school and college classes don’t teach us how to be responsible with our money. We learn all sorts of questionably-practical information like the Pythagorean Theorem but not how to file taxes or how to use a raise responsibly. 

To cover that gap in information, we’re here with three actually practical suggestions to use that raise in a way both your principal and your boss would be proud of. 

3 Practical Tips to Use a Raise Responsibly

1. Boost Your Retirement Savings

If your employer has a 401(k) plan, you should already be allocating 3–5% of each paycheck toward a retirement account, especially if your employer offers a 401(k) match. This means they’ll contribute as much to your savings as you do, up to a certain amount. Many employers match contributions up to 6% of your salary, and this is, literally, free money. If you contribute 3% of your $50,000 salary, that’s $1,500 a year from you and $1,500 a year from your employer for retirement savings. 

When you get a raise, you should adjust your paycheck to dedicate a portion or the full amount of that raise to your 401(k) contributions. This is an easy way to save more without much thought or effort needed. If you do this right away, you don’t get used to the extra money, and you just continue living and paying bills as you did before the raise. 

If you’re young, this type of contribution can be especially rewarding because of a concept called compounding interest. This means the interest on your investment earns interest, not just the principal (or original) balance. If you invest $1,500 with a 10% interest rate, your balance would be $3,890 in 10 years. With a simple interest rate that only builds on the initial investment amount, your 10-year balance would be only $3,000. 

2. Pay Off Debts

Another savvy way to use your raise is to allocate a portion or the full amount to your debts. This can be credit card debt, student loan debt, or even repaying a personal loan from mom and dad. But debt isn’t necessarily a bad thing. Certain debts like student loans carry low interest rates so when you consider how to use your raise, consider that other accounts or investments with higher interest rates might make or save you more in the long run. For example, if your student loan has an interest rate of just 8%, it makes more sense to pay off a credit card with a 24.5% interest rate or invest in a stock with a 10% return rate. 

>> Related: Should I Save or Pay Down Student Loan Debt?

3. Allocate the Rest to An Emergency Fund

We alluded to this before, but you don’t have to put all your extra cash in one place. If you get a 5% raise, you can direct 4% toward your student loans and put even 1% in an emergency fund. You should build the emergency fund until you have at least six months of your salary in the account to help you cover bills and general living expenses in case you find yourself suddenly out of work. If six months seems unattainable, aim for at least one or two months to give you four to eight weeks to find work. This emergency fund can also come in handy if unexpected medical bills or car repairs pop up. 

If you haven’t been lucky enough to get a raise from your employer, or if you’re looking to boost your savings even more, you can give yourself a raise by refinancing student loans. 

If you meet the eligibility requirements, student loan refinancing through companies like ELFI can get you a lower interest rate*, which means you could pay less each month and, subsequently, less over the life of the loan. Use the difference between your previous and current monthly payments as a raise. Then allocate that money to your retirement funds and toward paying off debts. You can refinance both private and federal student loans. 

Deciding how to use a raise responsibility is a big decision. Hopefully, with these tips, you can find ways to use those funds in a way that will give you even more play money in the future. The average raise is 4.6%, and with a little knowledge and discipline, you can turn 4.6% into thousands of dollars if you make the right choices on how to use a raise responsibly.

*Subject to credit approval. Terms and conditions apply.

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