Got a Raise? Don’t Blow It—4 Smart Moves That Build Real Wealth

The full article continues below these offers from our partners.

Make the Most of Your Extra Income

If you’re among the 58% of employees who got a pay raise last year or you’ve gotten one more recently, congratulations! What are you going to do with your extra income? You may be tempted to splurge to celebrate, but it’s wise to do that in moderation versus that becoming the new norm. Here are four tips for using your higher income to build wealth and keep your money working for you.

Tip #1: Don’t Let Lifestyle Creep Eat Your Raise

When your income increases, your standard of living may rise, too. While this can improve your quality of life, it’s important to avoid what’s known as lifestyle creep—when things that you used to view as special luxuries now become seen as everyday necessities. Buying too many things to enjoy at once or only being comfortable in ultra-high-end travel accommodations can be two signs of lifestyle creep.

In addition to perhaps not gaining much enjoyment from this extra spending, that’s cash you could be using elsewhere—and that could include in your savings. If you’re looking to boost your savings, it’s important to remember one thing: “Spending less than you make is the single greatest indicator of financial success,” said Rob Moore, MQFP and lead financial planner at Everman Prosperity.

Tip #2: Build Your Emergency Fund—And Make Sure It’s Beating Inflation

Some experts suggest saving three to six months’ worth of expenses in an emergency fund; your financial situation and goals will determine the ideal amount for you to save. Any amount you save can help reduce the financial impact of an emergency—but it’s important to pay attention to inflation so your money won’t lose value.

According to the latest monthly Consumer Price Index report, inflation was 2.7% in July—so any money you have in accounts earning less than 2.7% isn’t keeping up and is losing purchasing power. “Chances are your local bank is paying you next to nothing for the use of your savings,” so you’ll want to research options for high-yield savings accounts or money market accounts elsewhere and then make the move, Moore said. Some of the top-paying high-yield savings accounts offer up to 5.00% annual percentage yield (APY), while the best money market account rates now are up to 4.80% APY.

Tip #3: Use Your Extra Income To Crush Any High-Interest Debt

If you have credit card balances or other debt with double-digit interest rates, reducing that could be a focus for your additional income. If you have an emergency fund and don’t have a history of debt issues, focusing on paying down any higher-interest debt can help maximize your net worth, Moore said. If you tend to overspend or “if you have had trouble with debt in the past, it might be a good idea to hammer down all your debt regardless of the interest rate,” he said. 

Tip #4: Put Your Raise To Work for the Long Haul

One way to keep your higher pay working for you is to keep your savings rate constant so your contributions will increase each time you get a raise. Moore suggested another option where it’s feasible: “Increasing your savings rate by 1% with every raise has a powerful, exponential effect.” (If your raise is less than 1%, this strategy may reduce your take-home pay, he noted.)

You could opt to increase your contributions in a 401(k) or other retirement plan if available, or you could put additional savings into a high-interest account. In addition to money market accounts and high-yield savings accounts, certificates of deposit (CDs) can be a great option due to their guaranteed rates. You know how much you’ll earn at the end of the CD’s term, whether it’s a short-term one or it extends as far into the future as 2031—and you have many options, some with current rates up to 4.60% APY, that will keep you a step ahead of inflation.