Here’s how to maximize your pay raise — your future self will thank you.
- The average salary increase in 2022 was 4.8%, and almost one out of four companies are planning to or thinking about giving employees another pay raise this year.
- To maximize your pay raise, maintain your standard of living so you can save your raise.
- Your raise should also be used to pay off debt, build your emergency fund, invest for retirement, and reward yourself.
According to the US Census Bureau, the median household income was $67,521 in 2020, a decrease of 2.9 percent from the 2019 median of $69,560. This is the first statistically significant decline in median household income since 2011. The decrease is most likely due to the COVID-19 pandemic.
A survey of US companies found that the average salary increase for 2022 was 4.8%. In that same survey, 23% of firms stated they will increase pay again, and another 8% are thinking about it. Many companies are looking to give raises as they struggle to fill positions and in response to inflation running at a 40-year high. If you are lucky enough to get a pay raise this year, here are five key moves to make so you can properly manage and maximize your raise.
1. Maintain your standard of living
It is tempting to spend a pay raise by buying new things and raising your standard of living. A better bet is to keep your standard of living the same and sock away any pay raise you get. You can use the extra cash to invest or pay down debt. By keeping spending at the same level, the money is out of sight and out of mind. You won’t be tempted to spend it since it won’t be sitting in your checking account.
2. Pay down high-interest debt
In June 2022, the Fed raised interest rates by 0.75%, the largest increase since 1994. So far this year, the Fed has raised rates by 1.5% in total. The Fed also increased its target range for the federal funds rate from 0.75%–1% to 1.5%–1.75%. Credit card rates are correlated to the Fed’s actions. People with variable debt can expect interest rates to rise as well, usually within one or two billing cycles.
The average credit card interest rate is currently 16.73%, up from 16.34% in March. According to Greg McBride, chief financial analyst at Bankrate.com, “If the Fed raises rates by a total of three percentage points this year, your credit card rate will be three percentage points higher by the first of the year.” With rates for revolving debt likely to continue going up, any pay raise should be used to aggressively pay down debt.
3. Build your emergency fund
If you don’t have an emergency fund or if the pandemic left you without one, one of your top priorities is to rebuild your emergency fund. Your emergency fund should contain three to six months’ worth of expenses. It may need to be more depending on your job. An emergency fund will help protect your finances against unexpected events such as a job, medical loss problems, or car breakdowns.
4. Invest it
According to the largest survey of millionaires ever conducted, the key to financial success and becoming a millionaire is through disciplined investing. Eight out of 10 invested in their workplace 401(k), 403(b), or equivalent company retirement plan. In addition to their company investment plans, three out of four also invested in their brokerage accounts, a Roth IRA, or a traditional IRA.
5. Enjoy your success!
Treat yourself by celebrating your raise! Rewarding yourself can help improve your mental health. This can be in the form of a day at the spa, a nice dinner out, or a purchase you have been looking to make for some time. Don’t go overboard though — the goal is to use your pay raise to improve your financial well-being.
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