Five Things You Should Do With A Pay Raise

by Hank Coleman

What should you do with a pay raise?Believe it or not, people in America are still getting pay raises and earning promotions. Despite unemployment continuing to hover around the 9% to 10% mark, there are still people earning a pay raise.

For example, the United States military will receive a 1.9% pay raise in January. According to the Bureau of Labor Statistics, the average American worker saw a 2.1% pay raise in 2010, and the estimates are for about the same amount again this year. So, the real question becomes, what should you do with your pay raise?

Five Things You Should Do With A Pay Raise

Pay Off Some Of Your Debts

One of the best things that you can do with a new pay raise is to pay off your existing debt, especially credit card debt. Paying off high interest credit cards is exactly like earning that interest rate on a similar investment or savings account.

So, for example, if you pay off a credit card with your new pay raise that was charging you 16% annual interest rates, that is equivalent to earning a 16% rate of return on in investment with that same amount of money.

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This makes it easy to compare the opportunity cost of using your new pay raise. Which course of action would be the most profitable to you based on current interest rates on your debt and rates of return on investments?

Max Out Your Roth IRA Contributions

Far too many investors choose to reduce their Roth IRA contributions when times get tough. Time is the most important factor that young investors have going for them. You will never be able to get these years back that you have not been investing in the stock market. Now is the time to slowly work your way back into maximizing your Roth IRA contributions. Using your new pay raise is an excellent task for that new money.

Build Up Your Emergency Fund

Almost every financial planner on the planet shouts from the rooftops that we should all have at least three to six months of living expenses saved in an emergency fund. But, far too many people have not be able to reach that mark.

Now is the time to pump up your emergency fund with your new pay raise. You should consider doing it now while you are still living off your old salary and won’t miss the new money as it is deposited atomically into the savings account or money market fund where you keep your emergency fund stashed.

Add Some Insurance That You Are Missing

Do you have enough insurance to cover your family? Most people recognize the fact that we need life insurance to protect our loved ones who rely on our incomes to survive. But, do you have umbrella insurance in case you were to get sued? Do you have enough disability insurance?

Disability insurance is one of the most under insured areas where American workers are prone to be severely lacking in coverage, and it is one of the most needed areas of insurance coverage. One out of three American workers can expect to be disabled and unable to work for a significant amount of time at some point during their careers. That is too big of a gamble not to have insurance in place.

Spend A Little Of Your Pay Raise

Finally, many experts recommend that you use a little bit of your new pay raise as well. You earned it. You should reward yourself. One thought or rule of thumb may be to spend a certain percentage of your new pay raise on yourself or on something that you truly want to buy or do and have been waiting. This isn’t a carte blanche to go further into debt.

But, there is nothing wrong with using 10% of a pay raise to go to the spa, take a long weekend vacation, celebrate with a nice dinner out on the town, or any other similar things.

Now is the time to use your next pay raise to shore up your financial plan. If you have not been as diligent a saver or investor as you should have been, using a pay raise can be a great way to get you back up on the horse to a more consistent and better financial future.

A pay raise is like found money. You were living fine without it the month before. Using your new pay raise for an emergency fund, increase your investing, or shore up your insurance plan will allow you to do those things without sacrificing your current standard of living. Live off of your old paycheck and put your new pay raise to good use.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]

Hank Coleman has written 590 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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