I know raises aren’t as common these days, as many industries are still recovering — or aren’t recovering at all — from the nasty financial hits of 2020 and 2021.
But there are people out there whose income has increased recently — from a raise, from switching companies or from just finding a income stream — and it’s important to make sure those folks are thinking critically about how they’re going to use their new cashflow.
I got a raise this year, and I’m trying to figure out what to do with it.
I want to be clear: This isn’t a post lecturing people to save every penny (though of course that’s always an option). My concern here is less about what you decide to do with the funds and more about making sure you’ve actually made a decision at all.
It’s so easy for extra money to get used in dribs and drabs on randomness. I want to make sure that you know where your raise ended up.
Of course, this is all assuming you’re in the position — sadly, an increasingly privileged one — of being able to comfortably pay your bills and save. If you’re not at that point, I’m sure you know exactly where your extra income needs to go.
But for the rest of us, it can be a fun subject to explore. That said, before you can decide anything, there’s a very important step you need to take.
Know the actual increase
If you get a $10,000 raise, you need to remember that you’re not actually getting $10,000 more.
If you’re a W-2 employee, 7.65% of your raise will go to FICA. If you’re a contract worker, 15.3% will get eaten up by self-employment tax. And let’s not forget federal and any state income tax.
So go check with HR or review last year’s tax returns to figure out how much more money you’ll have in hand over the course of this year.
For me, the amount is right around $375 a month.
The obvious one: save
Most money nerds’ first instinct to “I’m getting more money” is to lock those funds away in a savings account and/or investment portfolio and spend their days admiring their higher balance.
And that is absolutely a valid choice, if you want. Especially if you’re not satisfied with how much you’ve been putting away.
If you were already in a good place financially, then I’m going to make the heretical point that you don’t have to put all of your money into savings and retirement. Technically, you don’t have to put any of it there, but most of us feel a little better knowing that our accounts are growing at least a bit.
I’m just saying that you can have a bit more fun with your money than just depositing it.
I won’t be saving all of my funds. But given the way I figure my finances each month, any part of the $375 that I don’t designate give a specific use will end up either in savings or retirement.
So if we’re not saving all of our new income, what are our other options?
Start funding a goal
I guess this sort of counts as saving, but I want to stress that the goal doesn’t have to be pragmatic.
Sure it could be “Well, that furnace is going to go soon, guess we should start saving up.” But it could also be something that you in no way need (in the strictest sense of the word, anyway): you could save for a remodeling project, a nicer car, a pricey vacation, the latest and greatest technology, a beautiful piece of fashion or jewelry, a vacation home, etc.
Just sit down and try to make a list of things that you keep finding yourself dreaming about. And don’t edit yourself. Don’t edit yourself with “should” or worry if it’s a “good use” of money. Just write down things you have repeatedly found yourself wanting.
Obviously, if it’s a long list, you may need to trim it a bit by asking, “Okay, but will this really increase my happiness long-term?” In that case, remember one of the only good points in Die With Zero: Good memories pay dividends later in life. So even a one-time thing like a vacation can increase long-term happiness.
Once you have a goal — or a short list of them — saunter over to your no-account-fee bank of choice and open a new account. Then just start making monthly deposits each month.
Personal finance folks tend to downplay non-necessities as, well, not necessary. But income permitting, it’s important to spend on things that make you happy, rather than things that just get you by.
Unfortunately, this one doesn’t really apply to me. After several months of saving, I just finally got a new iPhone. I’m good on clothes/jewelry. I don’t particularly want a nice car.
All in all, I don’t really want anything all that nice/pricey right now. So I’ll skip this one.
Even pre-pandemic, the ever-increasing cost of housing and school were straining a lot of people’s finances. Low interest rates have caused both homes and rental prices to skyrocket in many parts of the country. And now food prices are up too. It’s… a rough time for a lot of people.
So ideally, you’ll consider using some of your newfound “extra” money to donate (or increase your current donations) to some good causes. Because the money is much-needed.
And okay, I suppose this doesn’t technically make your life better, but the warm fuzzies from knowing you’re helping people are a pretty nice sensation. So that sorta counts.
Too cynical for the warm fuzzies? Well… you’ll get a tax deduction. Paying fewer taxes is a better life, right?
I’m increasing my donations by $50 a month. Or maybe $75. I haven’t quite settled on it yet. But it’ll be nice to be able to help at least one more place a month. Because every month I argue with myself about which groups get the money this financial cycle.
Incidentally, a few cool ones I learned about last year are:
Go with the Flow: This link is to the Arizona one, but there are groups like in this other states. This organization helps keep schools/teachers supplied with menstrual products so that people with periods don’t have to miss school. Because yes, there are people who have to stay home from school each month because they can’t afford sanitary napkins/tampons.
Together We Rise: Did you know that when kids are sent into foster care, they’re generally given a trash bag to gather their things? Quite the message we’re sending, no? This group supplies bags to kids being taken into the system. For younger kids, the bag will also have a stuffed animal and activity. The group also lets you donate birthday boxes, educational kits (STEM boxes for example), bikes, skateboards, etc.
Arizona Animal Welfare League: It has a low-cost vet clinic (including spay/neuter) and is no-kill. My vet friend says this really means “low-kill” so if you find a local no-kill rescue group, you may want to try to find out what their criteria is. Apparently, some are a little liberal with which conditions mean an animal should be put to sleep.
And of course, food banks, homeless shelters and shelters for victims of abuse are always good causes as well.
There are, of course, other very worthy organizations, but I don’t want to get into political debates in the comments. But I will say that one of them provided me with well-woman care and birth control when I was too broke for (pre-ACA) insurance but not broke enough for Medicaid.
Increase health spending
Even with insurance, it can be pretty expensive to see health professionals. So a fair number of people put off dental and doctor visits. Which can actually just make for a bigger bill further down the road.
In other words, if you’ve been putting off a trip to the dentist or doctor — or if you’ve been reluctant to start therapy (which, at this point, I think almost everyone needs) — this should probably be where at least some of your raise goes.
Go get your exam or get that filling your dentist recommended a while ago. Talk to your doctor about that weird clicking noise or some physical thing you’ve been just ignoring until now. And definitely find yourself a therapist, copays be damned.
But of course, this isn’t the only kind of health spending you can increase. If you want to be healthier — whatever that looks like to you — use some of the new money toward that goal.
Get a gym membership. Heck, get one that’s pricey enough that the guilt of not using it will make you go.
Or get a personal trainer so that at least once or twice a week, you will work out. Getting the ball rolling can be the hardest part.
Don’t like the regular gym? Check out a rock climbing gym or a parkour/Ninja Warrior set-up — anything that would keep you active without being the same gym grind that has failed you in the past.
Get a meal or meal prep delivery service so you’re less likely to eat takeout.
See a dietician to help you know what to eat. (Some companies will do metabolic work-ups to help you figure out what your body processes best. It’s pretty mind-blowing.) Or try sessions a hypnotherapist for help with exercising or eating better until those are more ingrained in you.
If you want to be healthier, figure out what it would take to get you into a routine and plunk down some of your new money on that.
I assume I don’t really have to spell out how being healthier — or even just the satisfaction and empowerment of making concerted efforts toward that goal — can make your life better.
Unfortunately, this is another area where I don’t really need anything. I already see healthcare professionals regularly. My frozen meals suffice (when I stick to my diet) so I don’t need a delivery service. I can get into a ton of gyms with my insurance. And I’m more or less back in the routine of working out regularly, so no personal trainer needed.
Beyond probably buying a couple more pairs of workout tights and tops, I don’t really think there’s much more spending I could do that would have any real effect on my results (or just general happiness).
Invest in your career
If you want the raises to keep coming, it might not be a bad idea to consider making your skillset or professional presence better.
A lot of fields are coming up with new innovations or new programs to keep up on. Or it may just be that your field encourages constantly broadening your skillset by learning new programming languages or software. (As a bonus, your employer may reimburse you for courses or classes.)
But it should be noted that the “investment” can also be more abstract. For example, you could take classes in public speaking. (Yes, I know Toastmasters is an option too.) And I’m sure there are classes/courses/people you can go to that will teach you how to be more confident and even assertive. Or to just give yourself a bit more gravitas so that when you go for a promotion, your boss can better envision you in a position of authority.
So putting a bit of your extra money into professional and personal development can make you a more attractive job/promotion candidate. Which can definitely lead to a better life.
Unfortunately, this doesn’t really apply to my situation, since I work for a small company and in very circumscribed fields. And there’s no need for any further skills for my work duties.
I’m not ruling out looking into online training for other remote work in the future, but for now the options are vastly unappealing/not workable. So this won’t be the year I broaden my skillset.
Increase indulgence spending
As I said earlier, some indulgences are good for the soul. So finances permitting, we should all have a little fun money to blow on trinkets or trips or whatever makes us happy.
Unfortunately, some people have problems rationalizing giving themselves much of a fun money budget. They’re uncomfortable with spending too much on things they don’t strictly need.
And if you never struggle to keep your fun money spending below your current cap, then you can ignore this section. But many folks wish they could let themselves spend a bit more.
Well, a raise seems like the perfect time to give yourself a little bit more freedom to spend on socializing or hobbies or whatever. It’s good for our mental health — which plays a part in our physical health, incidentally — to spend on things that make us happy. Because happiness is a need, too, folks.
So if you can afford to increase your spending on indulgences, why not nudge it up — at least a little bit?
And indulging can mean anything you want it to.
- Trying new restaurants or bars? Order me something (once omicron has calmed down a bit).
- Massage? Yessss.
- Convenience services like maid services or drycleaning? Relax and let the professionals do it.
- Beauty services? Lookin’ good!
- A new hobby? You go play with those bows or horses or… whatever.
- Spending more on existing hobbies? I’m all about pretty beads/yarn/whatever.
All that matters is that the money lets you do something you enjoy — or lets you avoid something you don’t enjoy. That’s pretty standard “better life” stuff right there.
I’m debating how/whether I want to increase my own indulgence spending.
My neck and back are a mess, so I see a massage therapist twice a month. Her rate is very reasonable, so two 50-minute sessions is only $130 a month, including tips.
So with the raise, I could actually afford weekly massages and still have about 2/3 of the new income to put elsewhere. Which is very tempting.
She also lives a 30-minute drive from me. So every time I see her, that’s two hours out of my day, plus that whole “I don’t love driving” thing. And I already have to try to fit in workouts and trivia and now some dating into my week. Oh, and this blog.
So I’m not sure if I’m up for weekly appointments, as lovely as the massages themselves sound. And she hates driving to people and thus, understandably, charges a premium for it.
One compromise I’m contemplating is just going up to 80-minute sessions twice a month. That would be $80 more a month, so I’d be indulging while still having more money left over for donations/saving/whatever.
So I may try that tactic and see how it goes. I can always take the plunge into super-indulgence and do weekly massages in the future.
Wow, I lead an incredibly privileged life. Definitely $75 more a month in donations, I think.
All in all
Hopefully, this post has given you some inspiration. It’s important to remember that (if you’re lucky enough to be able to to) you need to find ways to enjoy the present while you’re also securing your future.
While it’s getting better these days, the personal finance blogosphere has often lost sight of the fact that you can (and should) use money in ways that don’t involve compound interest. But no one tell the FIRE folks I said that.
And for what it’s worth, if I donate $75 more a month and get longer massages, I’d still have an extra $220 a month, which at this point would probably go to retirement. And over the next 20 years, that works out to about $115,000. So maybe even the FIRE folks would approve.
What would you do (or are you doing) with extra income?