When you get a raise, it’s tempting to go and spend it all on lifestyle expenses. While rewarding yourself a little bit for your hard work and success is important, you don’t want your lifestyle expenses to increase as dramatically as your income. Instead, you want to balance them with your overall financial goals by using your extra funds to get ahead financially. So, in this article, we’ll cover four smart financial moves to make after getting a raise.
1. Look over your overall finances
First, you need to take a look at your overall finances. You’re earning more, but you may also be paying more taxes. As a result, y our take-home pay may differ from what you anticipated. This is also an excellent time to review your budget and savings goals. You’ll have more money available for those savings goals, and you might find expenses you can cut to free up more cash. Additionally, looking at your budget allows you to treat yourself while staying within the limits of your budget and boosting those savings goals.
2. Get a life insurance policy
Life insurance is an important financial tool that can provide for your loved ones if you pass away. According to LIMRA’s 2022 Life Insurance Barometer, nearly a third of people are likely to get a life insurance policy in 2022. If the worst happens while your life insurance policy is active, it will pay your beneficiaries a significant death benefit. This can help them replace your income, pay off debts, and cover end-of-life costs like funeral expenses.
Your employer may offer a group policy in your benefits package, but these policies rarely provide enough coverage for a whole family. In that case, you’ll want to get life insurance quotes outside of work. Getting life insurance quotes online is often the best way to go since you can shop around for many from the comfort of your own home.
You can get a few types of life insurance outside of work:
Term life insurance
Term life insurance lasts 10 to 30 years, depending on your chosen term length. If you pass away during the term, your beneficiaries receive a significant death benefit. In addition, premiums are typically affordable with term life insurance since you most likely will outlive the policy.
Permanent life insurance
Permanent life insurance is more expensive than term life insurance, but coverage lasts a lifetime. You also get a cash value growth component. Part of each premium goes into this component, which then grows depending on the permanent policy type. When large enough, you can borrow against the cash value, withdraw from it, or receive the whole thing minus surrender charges if you surrender the policy.
Final expense insurance
Final expense insurance is a small whole life insurance policy designed for end-of-life expenses, like medical care and funeral costs. Coverage is much lower than a traditional permanent life insurance policy, but so are premiums, and there’s no medical exam. Regardless of policy type, it’s vital to shop for multiple life insurance quotes lock in the best rate.
3. Boost your retirement savings
Getting a raise is the perfect opportunity to bolster your retirement savings. If you have a workplace retirement plan, increase your contributions so you’re putting more in — especially if you have an employer match. Employer matches are free money, so you should at least hit that amount. This could help you reduce your tax burden while growing your retirement nest egg faster.
If you’ve already hit that matching limit, you may want to put your additional earnings toward an Individual Retirement Account or IRA. Here are two types:
- Traditional IRA: Contributions may be tax-deductible. Funds are not taxed until a withdrawal, or distribution is taken.
- Roth IRA: Contributions are not tax-deductible. However, qualifying retirement withdrawals are tax-free.
Consult with a financial planner or tax advisor to ensure you’re maximizing these retirement accounts’ benefits.
4. Increase payments toward debt
When you get a raise, it’s also wise to increase your efforts toward paying off debt. Start with “bad” debt, like consumer credit card debt. You can use one of two methods to attack this debt:
- Debt snowball: Put as much as possible towards the smallest debt while paying the minimum on the others. When you pay off the smallest, move on to the next smallest, and so on. This method helps build momentum and score quick wins but may cost more in interest.
- Debt avalanche: Put as much as possible towards the highest-interest debt while paying the minimum on the others. When you pay off the highest-interest debt, move onto the debt with the next-highest rate, and so on. This minimizes your interest costs but can take longer to build momentum.
Once you eliminate credit card debt, use the same method for unsecured personal loans. After that, many people can stop here. Mortgages, auto loans, and student loans may have lower interest rates and larger loan amounts — often, you can invest your additional money elsewhere to potentially out-earn that interest rate. That said, you have to do the math and consider if paying off one of these loans is worth it.
Use your higher salary to get ahead
Once you get a raise, it’s ok to treat yourself a little bit — but first, you want to set yourself up financially for success. Take this time to review your finances and budget to properly account for your increased taxes. Find areas to cut costs and see if you can boost your savings goals.
After that, consider looking for life insurance quotes to protect your loved ones in case you pass away. Shopping for life insurance quotes online can be the best way to do it since you can get multiple quotes in little time without leaving your home.
Once you’ve accomplished these critical tasks, use as much of those extra funds as possible to boost your retirement savings and reduce your debts. Get these bases covered, then treat yourself a little bit with the remainder.
Ultimately, it’s a good idea to consult a financial advisor to help you decide how best to use your extra earnings. They can help you work out your budget, maximize your retirement savings, target your debt, and find a life insurance policy.