How to maximize the benefits of a pay raise

You’ve worked hard. You’ve put in the extra hours. You’ve excelled at your job. And your employer has rewarded you with a pay raise. Now what?

Before you do anything, calculate the net amount of your raise. How much extra income will you be bringing home each paycheck after taxes, 401k contributions, health care benefits, etc.? Got that number? Great. That’s the first step to maximizing your pay raise.

When most people get a raise, they think solely about the gross amount. A 10 percent raise on $45,000 is $4,500, right? Technically, but you only have access to the net amount, which is closer to $3,150. What happens is that people start spending the gross amount and not the net amount. And over time, that disparity can add up.

So the next step, after you’ve figured out your net amount, is to take a look at your budget (if you don’t have a budget, create one) and your financial goals and figure out how to best allocate your new funds, dollar for dollar.

Are you struggling with retirement planning? Put your three percent raise into retirement planning. Do you have existing credit card debt? Use every additional cent in your paycheck toward paying off the credit card (and then destroy the card and never look back). Are you adequately contributing to your child’s college fund? Do you have one yet? (You should.)

Perhaps the most lucrative way to maximize your pay raise is to change your thinking about what pay raises should do for you. A pay raise shouldn’t be a means of rescuing you from financial trouble. In fact, it won’t rescue you, because more than likely the financial trouble you’re in has less to do with the amount of money you make and more to do with how much money you spend.

Think about your raise in terms of how it will enable you to need less, rather than how it will enable you to afford more. That way, the next time you receive an increase, it will feel less like a rescue and more like a bonus.

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