Navigating a pay raise: Strategies for maximizing your money
Despite uneasy feelings about the economy, many working Americans are enjoying higher salaries. Nearly two-thirds (64 percent) of working Americans reported getting a pay increase at some point in the past 12 months, according to a new Bankrate survey.
Being proactive with a pay raise is key to financial success. Instead of letting the extra cash slip through your fingers, devise a plan and allocate at least a portion of the money toward your biggest financial priorities, such as paying off debt or saving for retirement.
If you’re feeling stuck, a financial advisor can offer personalized guidance and help you make informed decisions that align with your goals.
Key takeaways
- Receiving a pay raise is exciting, but it’s easy to increase your spending without saving additional money. A financial advisor can help you make the most out of your new income.
- Many Americans are experiencing pay increases, yet some are still struggling to keep up with the current cost of living.
- More Americans are getting raises today than they were before the pandemic, but many say they’re neglecting their emergency savings due to inflation.
Key Insights: Pay raise insights
- Many Americans are earning more: Of the workers who received a pay increase within the past year, 38 percent got a pay raise at their current job while 16 percent found a better-paying job. Another 10 percent of survey respondents received both a pay raise and found a better-paying job.
- Workers are seeing modest raises: More than half of workers (52 percent) who received a raise or found a better-paying job in the past 12 months reported a pay increase of less than 5 percent and 28 percent of survey respondents reported a pay increase of less than 3 percent. Only 12 percent of Americans had a 10 percent or more wage increase.
- Employers are giving out performance-based raises more than cost-of-living adjustments: 35 percent of workers who received a raise say it was based on their job performance while 31 percent say they received the raise as a part of an annual cost-of-living increase.
- Workers blame inflation: About 60 percent of working Americans say their income hasn’t kept pace with increases in their household expenses due to inflation.
Be proactive with your pay raise
Receiving a pay raise at work is cause for celebration, but a higher salary is also an excellent opportunity to start tackling financial priorities.
Instead of falling prey to lifestyle creep, workers can put extra money from their pay raise toward long-term financial goals, like paying off debt or building up an emergency fund.
“Getting in the habit of paying yourself first — no matter how much money it is — is one of the best financial habits you can build,” says Sarah Foster, a principal writer and analyst with Bankrate. “After all, time in the market and compound interest pay the biggest dividends for your finances.”
Pay down debt
While strengthening savings and investments is important, redirecting a new pay raise toward debt repayment can help build a stronger financial foundation. Prioritizing high-interest debts, especially credit card debt, can reduce how much you pay in interest over time and improve your credit score.
With interest rates at their highest point in over 15 years, it’s more expensive than ever to carry a credit card balance. Yet 47 percent of credit cardholders are carrying debt from month to month, according to a recent Bankrate survey.
Paying off debt often draws money away from other financial goals, such as investing. For Americans expecting their finances to stay the same or get worse in 2024, 19 percent say debt is holding them back.
Eliminating debt is always a popular New Year’s resolution, and 2024 is no different. According to a Bankrate survey, 22 percent of Americans cited paying off debt as their main financial goal for 2024.
Boost your emergency savings
An emergency fund is a financial safety net that allows you to weather job loss, medical emergencies and other unexpected events without jeopardizing long-term goals or racking up high-interest debt. Financial experts recommend saving at least three to six months worth of living expenses to build a strong financial buffer.
Yet, 81 percent of Americans didn’t increase their emergency savings in 2023, according to a recent Bankrate survey, and a majority feel like they’re behind on achieving this goal.
Inflation and high housing costs challenge saving efforts, leaving less discretionary income to build an emergency fund. More than half (57 percent) of Americans who haven’t boosted their emergency savings or have no savings at all say inflation is keeping them from saving more, while 38 percent cite having too many expenses as the reason why they haven’t increased their savings.
“High inflation feels a bit like taking a pay cut, and it might be one reason why Americans suggest the economy isn’t as strong as it looks on paper,” says Foster.
Receiving a pay raise at work can be an excellent way to elevate your savings. According to a Bankrate survey, 15 percent of Americans cited saving more for emergencies as their main financial goal for 2024.
Increase your retirement savings
Time is a valuable ally in growing your investments, so the sooner you start saving for retirement, the better. By starting early, your money has more time to generate returns, and over time, these returns earn their own returns. This compounding effect can significantly amplify the value of your retirement savings over time.
But saving for the future isn’t always a top priority for Americans: Nearly 1 in 4 workers (22 percent) say they haven’t contributed to their retirement in at least a year, according to a Bankrate survey. Meanwhile, 56 percent of American workers feel behind on saving for retirement.
Understanding just how much to save for retirement can also be a challenge. Many experts recommend saving 10 times your annual salary by the time you retire, yet 37 percent of American workers say they need more than $1 million saved to fund their retirement and live comfortably.
Work toward your financial goals
Americans often juggle multiple financial goals at once, from saving for a down payment on a home to building an emergency fund. A pay raise can help make it easier to tackle multiple goals at once, but learning how to prioritize them isn’t always easy.
When your income changes, it’s smart to update your budget and take a hard look at where your money is going. About 13 percent of Americans cited budgeting their spending better as their main financial goal for 2024, according to a recent Bankrate survey.
Homeownership is another major goal for many people. In fact, 74 percent of Americans cited owning a home as part of the American dream, according to Bankrate’s Financial Security survey. But making that dream a reality is increasingly difficult as housing costs rise amid higher interest rates. Nearly half (46 percent) of aspiring homeowners say that not having enough income is holding them back from buying a home.
Money tip: Use a savings account to put away money from your pay raise and earn interest as your save for your specific goals.
Do you need a financial advisor?
Working with a financial advisor can be a smart move after receiving a pay raise. Financial advisors provide personalized guidance on managing money, investments and achieving financial goals. They can assess your unique situation, offer advice and investment strategies, and help you plan for major life events like retirement or a child’s education expenses.
Whether you should work with a financial advisor depends on your financial knowledge, goals and the complexity of your situation. If you’re confident about managing your own money, you may not need one. But if you’re uncertain about how to prioritize different goals or you need help constructing a tailored financial plan, a qualified advisor can provide the help you need.
If you’re not quite ready to work with a financial advisor, there are plenty of other ways to boost your financial knowledge. Robo-advisors can help manage your portfolio by automating investment decisions based on your goals and risk tolerance. Online apps and budgeting tools can help you track expenses and set realistic savings goals. Finally, researching personal finance topics from reputable websites can grow your financial know-how and help you make more informed decisions.
If you decide to work with a financial advisor, make sure to look for a fee-only fiduciary with credentials and experience. With the right professional by your side, you can create a custom plan that prioritizes your goals and makes the most out of your new pay raise.
Frequently asked questions (FAQs)
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It’s easier and cheaper than ever to start investing. Experts often recommend contributing to a workplace retirement account, such as a 401(k). Contributions provide a tax benefit when you file your federal return, and investments inside the account enjoy tax-deferred growth. Plus, contributions are automatically deducted from your paycheck, so you never need to worry about “forgetting” to invest. If you want to invest outside of a retirement account, numerous brokers offer $0 commissions on stocks, ETFs and mutual funds, while robo-advisors can create a custom portfolio based on your goals and risk tolerance.
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A financial advisor provides guidance to help clients manage their money and plan for their financial future. They help track, manage and balance investments as well as offer advice on topics like retirement planning, insurance, buying a home and budgeting.
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To create a budget, list out your monthly income and bills. Use a budgeting app or review past credit card statements to get an idea of how much you’re spending in various categories each month, such as entertainment, groceries and dining out. Some experts recommend setting a line item in your expenses for savings so you don’t forget to pay yourself first. Ideally, your expenses don’t exceed your income. Whatever money is left over is considered your discretionary income, or disposable income, that you can put toward non-essentials or financial goals, such as paying off student loan debt.
