Got a Raise? How Should You Really Spend Your Money?

Leonardo DiCaprio as Jordan Belfort in The Wolf of Wall Street

Leonardo DiCaprio in The Wolf of Wall Street | Paramount Pictures

Wondering what happened to your annual raise? So are millions of other Americans. Only about half of workers saw their pay increase in 2016, a survey by Bankrate found. Of those, just 37% actually got raises. The rest had to seek out a new job in order to boost their earnings.

The prospects for raises aren’t looking much better this year. Annual raises are becoming a thing of the past, as companies freeze salaries and look for other ways to compensate workers, such as performance-based bonuses.

If you are lucky enough to get a raise, it probably won’t be huge. The average worker should expect a modest 3% pay bump in 2017, according to the Society for Human Resource Management. For someone earning $48,320 per year — the average annual wage in the U.S. — that translates into an extra $1,450 per year, or about $120 per month, before taxes. Not exactly a life-changing amount of money but not chump change either.

Unfortunately, it’s easy to fritter away that additional income, especially if it only works out to an extra $50 per paycheck. Rather than paying down debt or saving more, you start spending a little more on coffee, groceries, or on weekly trips to the mall. Before long, it’s like your raise never even happened. But even a small raise can improve your financial situation, provided you make good use of it. Whether you’re getting an extra $10 a month or $10,000 a year, here are some suggestions for how to spend your pay raise.

1. Pay down debt

unpaid bills

A pile of past-due bills |

When Bankrate asked people how they planned to spend their raises, 22% said the extra money would go toward paying down debt. If you owe money on your credit cards or have student loans, using some of your new income to reduce your debt is a great idea. Doing so could shave thousands of dollars off of your total payments, Dave Ramsey noted. If you have $15,000 in credit card debt and decide to pay off an extra $80 every month, you’ll save $4,000 in interest and be debt-free years sooner than if you just made minimum payments.

2. Feed your emergency fund

emergency room entrance

Most Americans have less than $1,000 saved for a financial emergency. |

Nearly 70% of Americans have less than $1,000 in savings, according to GoBankingRates. Skimpy savings mean you’re more likely to reach for credit cards or rely on payday loans in an emergency. But those are expensive ways to manage life’s little crises.

Instead, use your raise to build a “just-in-case” fund — money you can use when your car needs new brakes or a broken wrist sends your kid to the emergency room. If your raise translates to an extra $100 per month, put that money in a savings account. In less than a year, you’ll have a $1,000 cushion and be in a better financial place than most people.

3. Save more for retirement

man and woman enjoying retirement at a beach

A retired couple relax on the beach. |

One of the best ways to stretch a small raise even further (and increase your overall financial security) is to put some of it toward your retirement savings. Rather than using your extra money to buy more stuff, put half — or even all — toward your 401(k). You’ll save on taxes, and your money will grow over time. Plus, by saving instead of spending, you’ll keep your annual expenses steady. That, in turn, will make it easier to maintain your standard of living when you do retire because you won’t have succumbed to lifestyle inflation. If you consistently direct 50% of your annual raise into retirement savings, you might even be able to retire years earlier than you expected, according to financial planning expert Michael Kitces.

4. Save for college

Penn State University campus

Students on the campus of Penn State University |

College costs keep rising, but only 57% of parents are setting aside money to pay for their child’s post-high school education, a survey by Sallie Mae found. If opening a college savings account for your kids is still on your to-do list, use your raise as an excuse to get started. Even modest monthly savings can make a major dent in tuition bills down the road.

If you take a $120 monthly raise and put it in an account earning 3%, you’ll have just over $34,000 in 18 years. Save $50 each month, and you’ll have an extra for $14,333 for books and supplies by the time your child graduates from high school. Check out the College Board’s savings calculator to find out how much your savings might grow before it’s time for your son or daughter to enroll.

5. Start investing

wall street sign

The Wall Street sign in front of the New York Stock Exchange | Stan Honda/AFP/Getty Images

You don’t need to be a millionaire to start investing. A small raise can turn into big bucks if you’re savvy about playing the market. Technology has made it easier — and cheaper — for novice investors to get their foot in the door. Robinhood has no account minimums and offers commission-free trades. Companies, such as TDAmeritrade and TradeKing, also let you get in on the action even if you don’t have a lot of capital to invest. Although there’s no guarantee you’ll be a successful investor, taking an extra $100 or $200 a month and using it to learn the ins and outs of investing could be a worthwhile endeavor.

6. Learn new skills

woman at cafe using laptop

Online courses make it easy to learn new job skills from anywhere. |

Disappointed with your latest pay raise? Expanding your skill set can make your more valuable to your current employer or more attractive to a new one. If your employer doesn’t pay for continuing education, take matters into your own hands, and sign up for a class or training program in a subject that will help your career.

Coursera offers affordable classes from top institutions (such as Johns Hopkins and Stanford) in in-demand subjects, such as data science, programming, public speaking, and digital marketing. Each course costs between $20 and $200. Or sign up for a class at your local community college or through your industry association.

7. Invest in a new wardrobe

saks off 5th

Shop at discount stores, such as Saks Off 5th, to upgrade your work wardrobe for less. | Cindy Ord/Getty Images for Gilt Groupe

The clothes make the man (or woman). If a paltry pay increase has you on the hunt for a new job, consider investing some of the raise you did get into a new wardrobe, so you look sharp when you head out for an interview.

While the do’s and don’ts of interview style vary depending on your industry — in conservative industries, a suit is still a must, but those in a creative field usually have more leeway — looking put together is not optional. If your frumpy suit is vintage 1990s, take some of your raise, and put it toward some more au courant apparel. Even if you’re not actively looking for work, a closet overhaul could improve your career prospects. Eighty percent of executives OfficeTeam surveyed said employees’ clothing choices influenced their chances of receiving a promotion.

8. Give to charity

salvation army red kettle

A person puts money in a Salvation Army kettle. | Tim Boyle/Getty Images

Americans give more than $250 billion to charity every year, with the average household donating between 2% and 3% of its income annually, according to the National Center for Charitable Statistics. If you’d like to give (or give more) to those in need but haven’t been able to make the numbers work in the past, now’s your chance. And you don’t need to wait until the end of the year to make your gift. Many organizations like to receive smaller monthly donations throughout the year because it’s easier for them to manage cash flow and make long-term plans.

Giving your $50 monthly raise to charity has benefits beyond the feel-good factor. You might get a tax deduction, for one. And if your company has a donation-matching program, you might be able to double the value of your gift — and your raise.

9. Go on vacation

Spirit airplanes

Airplanes sit on the tarmac | Joe Raedle/Getty Images

Frittering away your raise on frivolous purchases might not be wise, but that doesn’t mean you can’t have fun with your extra income. Use your raise to fund a vacation, and it could have benefits beyond just a few Instagram-worthy snapshots. Taking a vacation has proven health benefits, such as reduced stress, and it can help you avoid career burnout. And with the average vacation costing $941 per person, the typical $1,450 raise is almost enough to cover a trip for two.

However stingy or generous your raise, you can plan a memorable trip. A few hundred dollars is enough for a weekend getaway within driving distance, while a raise of a few thousand dollars can get you to a more exotic destination. Wherever you go, you’ll return to work refreshed and with the energy you need to succeed — and hopefully score an even bigger raise next year.

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