4 Ways to Make the Most of Your Raise

6 Minute Read

Everyone loves a raise—and who can blame us? Every little bit of extra income makes life that much easier. That’s probably why an ABC News survey shows that advice on how to get a raise is more important to most Americans than advice on reducing spending or increasing savings. A pay raise is the answer to both of those problems, right?

Most working Americans can expect a 3% bump in pay this year, the same average increase workers received last year and the year before that, according to the Society for Human Resource Management. On a $45,000 annual income, a 3% raise works out to $1,350, or $112.50 per month.

While it may not sound like all that much, it is extra money. What really matters is how you put it to use. Folks in the ABC survey had 20 spending options to choose from, and we placed their top choices into a few categories: Not a Terrible Idea, Huge Mistake and Great Idea. Do you agree with our reasoning, or are there better ways to use a raise this year?

1. Take a Vacation: Not a Terrible Idea

The most popular way to spend a raise, according to the ABC survey, is on travel and vacations. While we’re all for vacations when the bills are paid and you don’t have any debt hanging over your head, maybe a getaway shouldn’t be your top priority as you decide how to spend your raise.


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Take Rick and Carla, for example. They’re each making close to $45,000, so they’re expecting the average raise—$110 or so per month for each of them. But there’s some bad news. That $110 increase is based on their gross pay. Their actual take-home pay increase will be less—a lot less depending on the state they live in and their tax filing status. Since Rick and Carla live in a state with no income tax, their raises work out to about $80 a month each, making their $2,640 income boost look more like $1,920.

The average domestic vacation costs around $600 per person, according to the Bureau of Labor Statistics, so Rick and Carla could cover a quick escape for two without putting a dent in their budget. To truly enjoy their vacation, however, Rick and Carla need to make sure all their financial bases are covered and they aren’t using bill money, debt-snowball money or emergency savings to pay for their holiday.

2. Catch Up on Bills: Huge Mistake

Darlene can’t wait to get her raise. She’s been struggling to make ends meet for several months. With her $45,000 income, she can’t figure out how she’s gotten behind. But she’s sure this raise is the answer she’s been looking for.

Darlene’s plan to use her raise to catch up on her bills and cover other household expenses is the second most popular way to spend a raise. While this seems responsible, Darlene should be looking forward and using her raise to get ahead financially, not to stay afloat.

Her problem isn’t income—it’s budgeting. Darlene needs to get a handle on her spending by creating a budget where she decides how to spend each dollar she makes before it hits her bank account. With her everyday expenses covered by the income she already has, she can use her raise to pay off her debt.

3. Pay Off Debt: Great Idea

At least some of the people in the survey will use their extra income to pay off debt. If Darlene gets her spending under control and applies her $80 per month take-home pay increase to her minimum payment on her $15,000 credit card debt, she’ll be debt-free in a little more than two years and save more than $4,000 in interest!

Glenn and Deanna, on the other hand, are working on paying off their mortgage. Deanna doesn’t work outside the home, so the couple will use Glenn’s 3% raise on his $45,000 income to attack their home loan. By adding that $80 to their regular payment, they’ll pay off their $168,000, 30-year mortgage four years faster and save more than $21,000 in interest.

That $80 per month is starting to look less piddly now, don’t you think?

4. Save for Retirement: Great Idea

When it comes to retirement, your raise can do even greater things. Say Margaret gets a 3% raise on her $45,000 salary. She’ll have two options:

  • Option #1: Bump Up Her Take-Home Pay. Margaret can enjoy having an extra $80 per month in her paycheck.

  • Option #2: Put the Raise to Work in Her 401(k). Since her 401(k) contributions are pre-tax, Margaret can get more out of her raise by putting it toward her retirement. That $80 bump turns into about $110 when it’s invested before taxes. Over 30 years, that could add nearly $250,000 to her nest egg!

Would you rather add $80 to your monthly paycheck or nearly $250,000 to your retirement savings? By contributing more to her retirement account, Margaret lowers her taxable income and puts the full power of her raise to work building her nest egg. And what a difference it could make!

Margaret plans to talk to an investing pro to see if her 401(k) is the best place to use her raise to build up her retirement fund. She could also open a Roth IRA to build up her savings outside her workplace plan. While she won’t get the same initial tax benefits with a Roth IRA as she could with her 401(k), her Roth investments will grow tax-free and she’ll be able to use her savings tax-free when she retires.

A Raise Is Just the Beginning

If you’re using your raise to pay off debt or grow your retirement fund, you can be confident you’re making a choice that will positively impact your financial future. What could be better than that?

An investing pro is the ideal teammate to help you make smart moves that pay off in the long term. And with our SmartVestor program, it’s easy to find qualified pros to partner with as you build wealth.

Find an investing pro today!

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