You received a pay raise – congratulations! A salary increase is an exciting accomplishment that can make a big difference in your financial well-being. But before upgrading your lifestyle, it’s important to make intentional choices that support long-term stability and growth.
At District Capital, we work with professionals to create personalized strategies that help them make the most of income increases—whether that means boosting retirement savings, paying down debt, or investing for the future. In this blog, we’ll walk you through 8 strategic steps to take after a pay raise so you can leverage your increased income to build lasting wealth.
What should I do after a pay raise?
Here are 8 smart financial steps to take after you get a pay raise:
1. Assess your financial goals
Before making any decisions, take a moment to reflect on your financial goals. Define both short-term and long-term goals, such as retiring by 55, homeownership, debt reduction, or building an emergency fund.
Understanding your priorities will help guide you in allocating your increased income effectively. For example, if you previously set a goal to retire by age 55, you may want to use your pay increase towards your 401(k) or IRA. If saving for a house is your top goal, you can allocate your new money towards your down payment.
2. Review your budget
A pay raise provides an excellent opportunity to reevaluate your budget. Take the time to review your income, expenses, and savings goals. Keep in mind that certain portions of your raise will contribute to taxes and social security, if applicable.
For example, let’s assume that you are a single taxpayer, and live in a state with no state income tax. Your pay went up by $12,000, from $100,000 to $112,000. Your take-home pay will not increase by $1,000 per month. You will need to pay 24% in taxes (depending on your federal tax bracket) plus 7.65% in social security and Medicare taxes. After these tax deductions, your take-home pay might increase by about $683 per month. You can then decide how to allocate this in your budget.
It can be easy to fall victim to lifestyle creep after a pay raise. Instead of upgrading your lifestyle, consider maintaining your current standard of living and saving or investing the extra income. Maintaining a budget helps you build long-term wealth and can help keep you on track financially.
3. Increase retirement contributions
A pay raise is the perfect opportunity to grow your retirement fund. You may want to increase your retirement contributions, especially if you have an employer-sponsored retirement plan such as a 401(k) or 403(b). Increasing your contributions will not only accelerate your savings but also provide potential tax advantages. If possible, contribute at least enough to take advantage of employer-matching contributions available to you.
4. Pay off high-interest debt
If you have outstanding debt, especially high-interest debt, consider using that extra income to accelerate your debt repayment. You can save significant interest payments by paying off high-interest debt as soon as possible and expediting your journey toward financial freedom.
5. Build an emergency fund
Having an emergency fund is an important financial goal. If you haven’t already established one, allocate some of your income towards building an emergency fund. If you do already have one, you may need to reevaluate the amount needed if your spending does increase.
Your emergency fund should be enough to cover at least three to six months’ worth of living expenses. From unexpected emergencies to a sudden job loss, having an emergency fund is a great safety net and can mean the difference between relief and disaster.
6. Invest in yourself
Consider investing in yourself and your professional growth. Use a portion of your increased income to further your education, attend conferences or workshops, or pursue certifications relevant to your career. Expanding your knowledge and skills can enhance your earning potential in the long run.
7. Consult a fee-only financial advisor
A pay raise is a great time to start working with a fee-only financial advisor. They can assist in creating a personalized financial plan that aligns with your new financial circumstances, optimizing your budgeting, savings, and investment strategies. They can also provide invaluable insights into tax optimization, retirement planning, and diversifying your financial portfolio.
By entrusting a financial advisor, you are not just seeking advice – you are investing in a partnership that empowers you to build a solid financial foundation.
8. Do something fun
You earned a raise through hard work and dedication and you deserve to acknowledge that by treating yourself. Take that long-awaited vacation, purchase the shoes you have had on your wishlist all year, or spend the day relaxing at a spa. Recognizing your achievements and allowing yourself to do something fun is an essential part of maintaining motivation and a healthy work-life balance.
Curious about where your next dollar should go? Download our guide to help you decide!
What is the average pay raise in the US?
The average pay raise in the US is around 3-5%. According to Payscale’s Salary Budget Survey, employers are budgeting for an average 3.8% salary increase in 2024. Generally, a pay raise of around 5% is considered good, and anything more is considered exceptional. You may request a raise in the 10% to 20% depending on different factors such as the length of time that has passed since your last raise.
Did you get a pay raise?
By assessing your financial goals, reviewing your budget, and making informed decisions about debt repayment, savings, and investing, you can put your increased income to work effectively.
Interested in holistic financial planning with District Capital?
If you are interested in a comprehensive financial plan, including the best financial steps to take after a pay raise, schedule a free 30-minute discovery call with one of our financial planners today.
FAQs
1. Should I immediately increase my spending after a pay raise?
Not necessarily. While it’s fine to celebrate your raise, increasing your spending too quickly can lead to lifestyle creep. Many financial advisors suggest first reviewing your goals, savings, and debt before adjusting your lifestyle.
2. How can a pay raise improve my long-term financial health?
A raise gives you an opportunity to boost retirement savings, pay off high-interest debt, or build an emergency fund. Directing even part of your raise toward long-term goals can significantly strengthen your financial stability.
3. Is it smart to adjust my tax withholding after a raise?
Yes. A higher salary may place you in a different tax bracket or increase your tax liability. Reviewing your withholding can help ensure you’re not underpaying or overpaying taxes.
4. Should I update my financial plan when my income increases?
Absolutely. A pay raise changes your financial picture, which may affect your savings targets, retirement projections, or debt payoff timeline. Reviewing your financial plan helps you align your new income with your goals.
5. Can a financial advisor help me make the most of a raise?
Yes. A fiduciary financial advisor can help you prioritize how to allocate your increased income—whether toward investments, retirement accounts, debt repayment, or tax-efficient strategies.
Alvin Carlos, CFP®, CFA is a fee-only financial planner, in Washington, D.C. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is the founder of District Capital, a financial planning firm designed to help professionals in their 30s and 40s maximize their money and retire by 55, through holistic financial planning and research-driven investing. Schedule a free discovery call today.
