This post looks at some smart ways to spend a raise. If you’re a new visitor, I’ll give you some background to this post. I’m a huge believer in the merits of pursuing self-improvement. For the past year, I’ve been taking courses and participating in extra training at work with my sights set on a possible promotion and a higher pay level. I was recently informed that my hard work paid off and I got the promotion. That news got me thinking about all the things that I could do with the extra money. So I decided to fly to Vegas with the hope of hitting the Jackpot!
Nah, just kidding! That would be way too exciting of thing to write about for this boring old personal finance blog. Naturally, I’m going to discuss some ways to get ahead financially by banking – rather than spending – your raise.
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From time to time, throughout our working lives, we will get raises. The raise could simply be an annual cost of living increase or a big promotion with a bigger paycheck, or maybe you switched jobs and are making more money. If you’re lucky enough to get a raise, good for you! Now let’s look at how you can save it to improve your financial situation.
Don’t Spend the Raise!
First off, do NOT spend it! Unless, of course, you’re spending it on investments! Don’t be like everyone else and spend on a bunch of crap. Most people get a raise and immediately go out and buy a new car, a bigger home, a vacation property, or some other stuff that they really don’t need. As their income rises, so does their spending. This is the reason that they’re broke and living pay to pay. It doesn’t matter how much money a person makes, if they don’t manage it right then they’ll be broke as a joke forever!
We see this all the time with Movie Stars, Rock Stars, Pro Athletes, doctors, lawyers etc. All of them make big money, but when they spend it all on a bunch of stuff, they quickly go broke like the rest of us. So it really doesn’t matter how much money a person makes…it’s all about how much they SAVE!
If you want to be smart with your money then try to bank every raise you get!
Here are some ideas on how to “spend” your raise the smart way. Doing any one of these things will, no doubt, dramatically improve your finances.
1. Use Your New Raise to Pay Down Debt
This is sort of a no-brainer. When you start earning more, pay down some debt. As a society we are in over our heads with all kinds of debt: monster mortgages, home equity lines of credit (HELOCs), car loans, regular lines of credit, credit cards, consolidated loans and so on. If you get a raise, it’s always a good idea to pay down debt. After all, I’ve never heard anyone complain that they wished they hadn’t paid off their debt!
Now that interest rates are on the rise, all of that debt will cost you a lot more. So be smart and use the extra money from your raise to pay it off. You’ll save a ton of money by paying less interest and you’ll be less stressed about your financial situation. Paying down debt makes us healthier all around!
2. Save for Retirement
So many people are worried that they won’t have enough money to retire. If you’re in this boat, then you should definitely consider setting some money aside for your retirement. It’s never too early or too late to start saving for retirement. The earlier you start, the more compounding will help grow your retirement nest egg. Saving money in a retirement account will also get you a tax refund that you could use to invest or to pay off debt.
3. Start Investing in A TFSA
If you feel that you can easily manage your debt and your retirement savings is maxed out then you might consider opening an investing account like a TFSA. These accounts offer tax-free benefits on money earned from your investments. So it’s definitely worth opening one. If you’re not familiar with the TFSA, read my TFSA Rules.
4. Start Investing Outside of Retirement and Tax Free Accounts
If you’re a diligent saver and have maxed out your retirement and tax free accounts, then consider investing in a collection of blue chip dividend stocks in a regular taxable account. I say invest in dividend stocks because dividends are taxed more favorably outside of tax sheltered accounts. I use a combination of Share Purchase Plans (SPPs) and my Questrade account for this purpose. For more information read my How To Guide on Opening a Questrade Account.
5. Save For Your Child’s Education
If you have children, consider starting a registered education savings plan (RESP). You can contribute up to $2500 per child and the government will give you another $500. You can grow that money tax-free until your child is ready to attend a college or university. Tuition costs are already crazy high right now and will only continue to increase over time. So it makes sense to start saving for this now.
As you can see, there’s no shortage of options on where to put that extra money when you get a raise. For most people, the biggest bang for their buck would be to take the extra money from the raise and put it in their retirement account and use the tax refund to either pay down debt or invest. I think I’ll probably pay a bit more off my mortgage and invest a bit more when the markets hit a rough patch. Regardless, any one of the options listed above will most certainly improve your financial future. So be smart and save the raise!