What to do after receiving a pay rise

1 min read by Unbiased team Last updated June 14, 2024

Find out how a pay raise can enhance your financial health and why you need to manage the tax implications of an increase.

Summary 

  • A pay rise gives you the opportunity to improve your financial health and grow wealth. 

  • It may also mean more taxes, but there are ways to reduce your tax burden. 

  • Knowing what to do with a pay rise can help you meet short- and long-term financial goals. 

  • A financial advisor can offer you personalized financial advice to help you make the most of your pay rise. 

What to do after receiving a pay rise 

A pay raise is an excellent opportunity to improve your financial health and increase your wealth, provided you have the self-discipline to do so. When you get an increase, it's best to put the brakes on any lifestyle upgrades until you've thoroughly assessed what to do with a pay rise.  

You can begin by assessing your current financial situation and determining your short- and long-term financial goals. 

When evaluating your current financial status, you should check your savings, debts, fees, costs, and spending habits. Next, update your budget to reflect the pay rise percentage, ensuring it's allocated so you can pay off debt and grow wealth faster.  

Let's take a closer look at the aspects to consider when updating your budget: 

  • Pay off outstanding debt  

First and foremost, use your pay raise to pay off outstanding debts.  

Debts with high interest, like credit card balances, can quickly spiral out of control.  

Reducing or eliminating these obligations frees up your future income and improves your financial health. Think of it as giving yourself a raise by not paying so much interest. 

  • Adjust your budget with increased income 

Next, update your budget to reflect your new income level. This is your chance to reallocate funds towards savings, debt repayment, and other financial goals.  

Start by increasing your savings and emergency funds, where you allocate a portion of your raise to build a suitable safety net for unexpected expenses.  

Then, consider adding more to your retirement savings, which can significantly impact your future. 

  • Increase savings and emergency funds 

Boosting your emergency funds is crucial.  

Aim to have at least three to six months' worth of expenses saved.  

Gradually increase your savings rate by setting aside a small percentage of your pay rise every month. This incremental approach makes it easier to build wealth over time without feeling the pinch. 

  • Increase retirement savings 

Enhancing your retirement savings is a smart move.  

The benefits of compounding interest mean the earlier you save, the more you'll have later.  

Consider increasing your 401(k) contributions to the max or opening an IRA. Even a tiny increase now can contribute to a more comfortable retirement down the line. 

  • Explore investment opportunities 

With extra income, explore new or additional investment opportunities.  

Diversify your investment portfolio with bonds, stocks, and retirement accounts. Investing can help grow your wealth quicker than traditional savings. 

However, be sure to research thoroughly or consult a financial advisor before making investment decisions. 

  • Work towards your financial goals with the help of a financial advisor  

Consider working with an SEC-regulated financial advisor to achieve your financial goals.  

An advisor can provide personalized advice and strategies tailored to your situation. They can help you decide on investments, plan your retirement, and more.  

To find a reliable advisor, use a reputable resource like Unbiased to match you with a financial advisor who is best suited to your goals and requirements. 

What are the tax implications after a pay rise? 

Receiving a pay raise can bump you into a higher tax bracket, meaning you'll owe more money in taxes.  

It's essential to understand how this affects your take-home pay. A higher income also impacts your eligibility for some tax credits and deductions, such as the Earned Income Credit Tax (EITC) or child tax credit. 

Consider the following tips to manage these tax implications effectively: 

  • Check your W-4 form and adjust your tax withholding to reflect your increased income. This helps to prevent underpayment and avoids a large tax bill in April. Use the IRS withholding calculator to work out the correct amount. 

  • Contributing more to your 401(k), IRA, or Health Savings Account (HSA) can reduce your taxable income. These accounts offer tax benefits and help you to save for retirement and healthcare expenses. 

  • Donating to charity can provide tax deductions. Ensure you keep records and receipts of all donations so you can claim them on your tax return. 

  • Track work-related expenses that may be deductible, like union dues or unreimbursed job-related costs. Keep detailed records to maximize these deductions. 

Get expert financial advice 

Knowing what to do with a pay rise gives you many opportunities to enhance your financial health by paying off debts, adjusting budgets, increasing savings and retirement funds, and exploring investments.  

However, managing tax implications is crucial, requiring adjustments to tax withholding and strategic contributions to tax-advantaged accounts. Consulting with tax advisors and financial planners ensures optimized tax strategies and effective financial planning.  

For expert financial advice, seek a financial advisor through Unbiased. 

Writers

Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.