5 Smart Steps to Take After Raising Your Income

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Increasing your income is always exciting. Earning more never hurts, and it's especially helpful if money has been tight recently. It's also a sign that your hard work is paying off, which is a rewarding feeling.

After you're raised your income, it's good to think about what you'll do with that additional money. There are a lot of options, including investing in stocks and building your emergency fund. But if you don't actively plan how you'll use your raise, you may just end up spending it, without much benefit to your finances or your life.

To make the most of your higher income, here are some steps to consider.

1. Pay down high-interest debt

If you currently have any high-interest debt, put at least a portion of your raise toward that. Probably the most common example is credit card debt. Lots of people carry balances on their credit cards, and it's expensive. The average interest rate is 21.51%, according to Federal Reserve data. On a $5,000 balance, you'd pay about $1,075 per year in interest.

2. Contribute more to retirement accounts

Retirement accounts allow you to save on taxes while investing money for retirement. Because of their tax benefits, they also have contribution limits.

As of 2024, you can contribute up to $23,000 to your 401(k), plus $7,500 in catch-up contributions if you're 50 or older. The contribution limit for individual retirement accounts (IRAs) is $7,000, plus $1,000 in catch-up contributions if you're 50 or older.

If you're not already maxing out your retirement accounts, you may want to put some of your raise toward either your 401(k) or IRA. You'll build your retirement savings more quickly, and you'll save more on taxes.

3. Add to your investments

Along with retirement accounts, you can invest through a taxable brokerage account. While this type of account doesn't offer tax savings, it also doesn't charge an early withdrawal penalty.

IRAs and 401(k) plans normally do if you make a withdrawal before you're 59 1/2. Taxable brokerage accounts don't have contribution limits, either.

You could invest through a taxable brokerage account if you're already maxing out your retirement plans. It's also a good idea if you'd like to have investments you can access penalty-free at any time.

4. Boost your savings

Investing is important, but so is your savings. It's widely recommended to have at least three to six months of living expenses saved for emergencies. If your living expenses are $4,000 per month, you'd want $12,000 to $24,000 in emergency savings.

You also need savings for any major upcoming expenses. Want to take a holiday trip to see family? By saving for that, you won't need to go into debt. Planning to buy a house within the next two years? You'll need to save enough for a down payment.

Pro tip: Make sure you're getting a competitive rate on your money. The best high-yield savings accounts are offering rates of 4% to 5% or more. If your bank is one of the many still paying sub-1% rates, you could earn much more interest by switching to a high-yield account.

5. Use it to improve your quality of life

When you start making more money, it's wise to use part of it on something financially responsible. Working on debt, building your retirement nest egg, etc. But you can and should spend some of that money on yourself, too. You've worked hard, and you deserve it.

You could go out with friends more often, and pick up the whole tab on occasion. You could devote more money toward a hobby you're passionate about, such as video games or traveling. It's up to you, so think about where you'd love spending more money.

Now that you know about some of the best ways to use a raise, you can figure out which ones are right for you. By planning ahead, you'll ensure that your higher income helps you work toward your money goals, and that you'll also be able to enjoy that money.

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