SoFi

If you received a raise at work, first things first: Congratulations! Your first impulse may be to celebrate with a big purchase or party. But rather than blowing your salary bump right away, it’s wise to be strategic. Take a little time and consider how you might use that extra cash. It could help you reach some short- and long-term financial goals.

There can be a lot to consider, but keeping a few things in mind may help you figure out the best course of action.

How to Financially Handle a Pay Raise

To help you decide what to do with a pay raise, you’ll want to think broadly, and about the future. Here are a dozen tips that may help you be better informed as you make your decision about what to do when you get a raise.

1. Using It to Get Rid of Debt

Your raise may be able to help you get rid of some debt that is dragging down your finances. It’s worth noting that some debt can be good, like a mortgage on your home, which tends to have a relatively low interest rate. Every time you make a payment, you are building equity and wealth.

But if you have debt that carries a high interest rate and doesn’t have a long-term benefit, you may want to pay it off as soon as you are able. Credit card debt is the classic example of this. Interest rates on new cards can be as high as 20% or more, which means this kind of debt can grow quickly. With a raise, you can pay that debt down sooner rather than later. This can help free up your finances to focus on other money goals.

💡 Quick Tip: As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.

2. Using It to Build Your Emergency Fund

Having extra cash is a perfect opportunity to build an emergency fund if you don’t have one or if yours could use a boost. Financial experts advise having at least three to six months’ worth of basic living expenses in the bank. This can tide you over if, say, a big medical bill or car repair hits or if your family were to endure a job loss. A raise can allow you to set a lump sum of money aside or motivate you to regularly allocate toward your emergency fund so you are financially secure in times of need.

3. Re-Evaluating and Updating Your Budgeting

When you get a raise, you may be wondering how to manage this extra cash. There are probably a lot of wish-list items tempting you to increase your spending. Instead of shopping, it may be a good time to reevaluate your budget to see how you can best put your money to work.

Typically, budgets recommend that you first allocate funds toward your mandatory monthly expenses like mortgage, rent and other bills. Next, don’t forget to pay down debt, followed by adding some money to your emergency stash if needed. Have you also thought about retirement funds?

Make sure to figure out how much to save every month and put some of your money to work in a 401(k) or another retirement fund. With the money that’s left, you can spend as you see fit, invest it in the stock market, make charitable donations, or decide other ways to use it.

If you need more guidance on budgeting, look online at different techniques, such as the 50/30/20 budgeting rule, or test-drive some apps that help you see where your money is going and determine how to best manage it.

4. Avoiding Lifestyle Creep

If you are contemplating what to do with a raise, one thing to sidestep is lifestyle creep. That happens when a person makes more money but also spends more of it, typically on luxuries. So if you get a raise and then rent a more expensive apartment or sign up for a luxury-car lease, that’s lifestyle creep. You have bought into some of life’s finer things, but you may wind up just breaking even. In fact, even with more money, you may feel as if you are living beyond your means.

It can be smart to try and avoid this behavior because you don’t want to spend every penny you make. That’s not a healthy financial habit; it doesn’t help you build wealth over time. Yes, you can allow yourself to enjoy some discretionary spending (more on that in a minute). But if you let lifestyle creep happen, it may be hard to make ends meet and find opportunities to save for longer-term goals.

5. Re-Evaluating Your Retirement

When you get a raise, you have a prime opportunity to increase your retirement savings. It may not sound like fun compared to taking a vacation, but allocating money this way can be a good financial strategy to reach your goals.

If you have, say, a 401(k) plan with your employer, you can increase your monthly contribution and possibly snag the employer match, too, which is akin to free money. While it may not feel like a fun use of your raise now, your future self will thank you when you see how well your retirement savings are growing.

6. Invest in Yourself

Consider how your raise might help your long-term wellbeing, your mood, and your quality of life. Would it be wise for you to get in better shape? Have you been having trouble sleeping for a while? Do you feel hungry to learn a new skill? A bit of extra money might help you resolve those situations. Sometimes, not having enough money is a common and valid reason for not doing more of this kind of self-care.

Maybe, with your raise, you can now afford to take a few fitness classes and learn some moves you can do on your own. Perhaps you can work with a therapist on what’s keeping you up at night. Or maybe it would bring you joy to take some guitar lessons or pursue a continuing-ed class in a topic that has always fascinated you. Putting a portion of your raise to work this way can be rewarding on so many levels.


💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

7. Considering Inflation

Inflation has been very much in the spotlight lately. In recent years, inflation has reached highs not seen in decades. When inflation is high, your purchasing power declines. Simply put, your dollar doesn’t go as far.

If you get a raise during a period of high inflation, do the math. If you receive a 5% raise and inflation is 3.6%, then you are staying (just barely) ahead in terms of your finances. That raise is helping to protect your money against inflation but unfortunately it won’t stretch much further. This perspective is good to keep in mind so you don’t overspend and wind up with debt.

8. Preparing for Taxes

Getting a bump in your salary may impact your tax liabilities; it may nudge you into a higher tax bracket. If this is the case, your tax rate will rise, and you may need to pay out a higher percentage in taxes. Typically, this will only take your effective tax rate up a couple of percentage points, but it can make a difference to your bottom line.

To offset that, you may want to adjust your withholdings with your employer. If more money is withheld during the year, you could owe less or get a refund at tax time. This could help you avoid an unpleasant surprise (namely, a tax bill) come April.

9. Saving up More for a Large Expense

Are you saving for a vacation, a wedding, a home renovation, or a new car? If you have a big-ticket item on the horizon, you may want to put part of your raise towards that goal. It can be a good move for your finances in the long-run. The extra money can help you afford what you are saving toward. You can sidestep debt as you make your dream a reality. By doing so, you’re likely improving your credit and building wealth — it’s a win-win situation.

10. Investing Your Money

Investing your hard-earned money is historically one of the best ways to build wealth. For some, that can be a good reason to allocate some of your raise to increasing their investments.

A good place to start is by creating an investment portfolio with stocks, bonds, exchange-traded funds (ETFs) and other assets. This can be a vital part of making your financial plan.

11. Funding and Starting a Side Hustle

If you dream of building your own business from a hobby someday, you could use money from your raise to start a side hustle. If, say, you love making pastry, you might invest in cookware that will take your game up a notch. Or if creating apps is your passion, perhaps there’s a weekend class that could boost your skills. Keep tabs on how much money you allocate toward this side hustle and make sure these funds put you on a path to building a business.

12. Enjoying Your Financial and Career Successes

Many of these tips for using your raise wisely revolve around paying down debt, achieving long-term financial goals, and building wealth. But of course, do use a portion of your raise to reward yourself. You’ve received a financial award because of your hard work and dedication. You deserve to treat yourself! Whether that means having a fantastic dinner out with a couple of close friends or buying a coat you’ve been eyeing for a while now, you should find a way to mark this happy moment.

Managing Your Finances with SoFi

Getting a raise is an exciting life event. It shows that your hard work has paid off and your career is making progress. But it also means that you need to make some decisions about what to do with your money – it can be both exciting, and nerve-wracking.

Making some smart decisions about saving, investing, or even investing in yourself may be a good path. But again, it’ll come down to you, your goals, and your preferences. It may be helpful to speak with a financial professional, too.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How do I avoid spending too much after I get a raise?

Create and stick to a budget. Even though you are making more money, you still have to be conscious over where your cash goes and avoid lifestyle creep, which involves spending more as you earn more. This can make it harder to achieve your financial goals.

Is it okay to treat myself when I get a raise?

It’s definitely reasonable to treat yourself when you get a raise; you earned it! But it’s not a habit that you want to get out of hand. You want to make sure you’re spending within your means and not accumulating debt.

Can a pay raise be a negative?

A raise can potentially be a negative if you spiral into unreasonable spending. You could wind up with debt to deal with. Also, take note if your raise pushes you into a higher tax bracket, which still means you’re making more money, but you’d be paying a higher tax rate on a portion of your earnings.

Photo credit: iStock/fizkes

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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