What 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 be high, there are still people earning a pay raise. For example, the United States military will receive a 1.9% pay raise in January. So, the real question becomes, what should you do with your pay raise?

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. 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.

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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]MoneyQandA.com.


Hank Coleman has written 586 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 11 comments… read them below or add one }

John S @ Frugal Rules

Great points. I think the temptation to allow it to grow into lifestyle inflation or spend it on something needless is pretty big. Sure, it’s nice to treat yourself to something, but should be done within reason. I usually look for things that I’ve wanted to put money towards or other ways to save/invest the extra money.

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Glen @ Monster Piggy Bank

Great advice! It’s just too easy to waste a pay rise on something stupid. I always try to further paying off my debt with any pay increases or bonuses I get.

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Money Beagle

We haven’t gotten pay raises in over three years. Oh the fun of being owned by a venture capital firm. But, they’re talking of spinning us off so maybe that will lead to better things 🙂

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William @ Drop Dead Money

We did the retirement max-out thing (and we’re glad now we did)… but not before celebrating with a lovely steak dinner! 🙂

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WorkSaveLive

We handle pay raises a little different than we handle lump sums of money (i.e. tax return, bonus, etc), but for raises we focus on increasing the percentage in the 401(k) contribution and the remainder gets added to the budget (disposable income) which will then be allocated to whatever goal we’re on at that time. Right now, that’s saving a down payment for a house!

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krantcents

When I was in private industry and received raises, I used to save 50%. I feel the same way about bonuses.

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Thomas S. Moore

Currently my wife and I increase our 401k by the percentage of the raise we get. We do the same with bonuses and extra checks since we both get paid bi-weekly. Our goal is to save and max out as much as possible while we can for the next 10-15 years. We need a larger enough savings to make 10% return make a lot of money.

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Elizabeth @ Simple Finance

My husband has it built into his contract that his raises automatically go to his 401(k) unless he requests otherwise in writing. It makes it really easy for us!

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Financial Samurai

No Vegas trip for the boys?

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Brett @500aMonth.com

I’ve actually got my next raise already planned out. In addition to using the additional income to help pay down debt I will also be maxing out my 401K company match benefit at 4%. Pretty much a no brainer I guess.

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CreditDonkey

Extra money is always welcome for me, and I take advantage of spending it on things I really need around the house but hasn’t gotten to buying due to lack of budget. Pay raise is a regular additional income so if I get one anytime, it goes to my investment account and emergency fund.

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