5 Things to Do After You Get a Pay Raise

A recent pay raise presents a great opportunity to take another look at your financial situation and come up with a more effective strategy to reach your goals. Whether it was due to a promotion or the result of merit-based recognition or cost-of-living adjustment, a higher salary helps give you more control over your everyday finances.

But getting a raise can also improve your long-term outlook—assuming you hit pause on any immediate spending plans. Making time for a handful of strategic moves may put you on more solid financial ground.

Recent salary increases

Over the past year, 64% of workers got a raise, according to a Bankrate survey released at the end of 2023. While the salary increases resulted from both receiving raises at current jobs and finding higher-paying positions, those who switched employers tended to see larger increases.

March 2024 data from the Federal Reserve Bank of Atlanta showed that last year's median wage increase was 5.6% for those who switched jobs, compared to 4.9% for people who stayed put and received a raise.

If you're one of the fortunate people who got a raise recently, here are five steps you can take to help prepare for your brighter future—after a proper celebration, of course.

1 Assess the true impact before you spend the money

Your first step is to determine the actual effect on your net income, which might mean waiting for a paycheck or two.

A pay raise could push you up a tax bracket, and you might have more taxes withheld as a result. Other percentage-based deductions, such as for retirement plans or health savings accounts, could also be higher.

And then there's inflation to consider. With the uptick in inflation in recent years, many everyday items and household expenses have increased in cost, which means you may need to use some of your wage increase to maintain your current standard of living.

Once you have a sense of how much extra income the pay raise will actually produce, you can begin figuring out the best ways to put it to work. What you do will depend a lot on your personal situation—including where you are in your career—but there are other factors to consider as well.

2 Pay off higher-interest debt

An important factor to weigh after a pay raise is your total outstanding debt—particularly high-interest-rate loans such as credit cards or car financing.

According to Experian's Automotive Finance Market Report, overall average interest rates for auto loans in the fourth quarter of 2023 were 7.18% for new cars and 11.93% for used cars. The rates are even higher for many credit cards. According to the Consumer Financial Protection Bureau, the average annual percentage rate on credit card balances was 22.8% in 2023—an all-time high. So increasing your payments to reduce or eliminate high-interest debt may be a good strategy.

However, when it comes to your mortgage, consider your rate before increasing your monthly payments. While it may be tempting to gain equity in your home at a faster pace, you may be able to earn more on additional income by investing it in a savings vehicle.

3 Build your stash of emergency cash

After addressing your debt, another step is to create or add to an emergency fund. This can help you manage unforeseen circumstances, such as a loss of income, significant medical expenses or large home repairs. Recommendations for how much money to keep in an emergency fund vary, but a good place to start is by setting aside the equivalent of 6 months of household expenses.

And because you might need to access your emergency fund on short notice, you should keep the money in a safe, highly liquid account. Checking and savings accounts are good, but you might be able to earn a higher interest rate by opening a money market account dedicated to serving as your emergency fund.

4 Start building for the future

With these foundational aspects addressed, you can start to focus on savings for various purposes—from buying a new house to providing retirement income.

Traditional savings accounts provide security but don't typically have attractive interest rates. However, many institutions offer high-yield savings accounts that will help your money grow faster. In addition, you might be able to take advantage of accounts created for a specific purpose, such as a health savings account to cover some out-of-pocket medical bills.

There are also vehicles that not only help you save but that also offer tax advantages. Contributions to an employer-provided retirement fund, for example, lower your taxable income, and the returns are tax-deferred. Similarly, individual retirement accounts and 529 college savings accounts offer tax-deferred earnings, and your contributions are tax-deductible.

5 Add layers of financial security

As your net worth grows, you'll also want to explore whether you need to add—or expand—your insurance coverage to protect what you've achieved. Because there are different types of insurance to meet different objectives, you'll probably want to speak with an advisor to determine what kind of policies are best for you.

These options could include disability insurance to replace lost income, life insurance to provide for loved ones and potential riders to add benefits like long-term care insurance.

The bottom line

There are certainly short-term benefits when you get a pay raise, including having a little breathing room when it comes to your current household expenses. But a methodical, strategic approach to managing your extra income can also pay dividends down the road and provide a more secure financial future.