This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Give your extra money the best chance to improve your life.
Image source: Getty Images
Living paycheck to paycheck is the worst. You can never quite afford to get ahead, and maybe you dream of what you’d do if you ever broke out of that lifestyle. Chances are, you’re not dreaming of updating your budget, changing bank accounts, or still having to carefully consider your spending — none of those are sexy tasks.
But if you are starting off 2023 with a higher salary, thanks to a raise, a job change, or a side hustle, it’s incredibly important to look at all these moves, and more. After all, you’ve got a chance to make some positive financial moves with your extra money. Here’s what to do, step by step, to make sure your new salary truly benefits your life, both now and in the future.
Step 1: Re-evaluate your budget
Nobody likes the “B” word, but if you’re to truly know where your money goes month after month, a budget is essential. Personally, I think it’s fun to adjust the “income” line of the spreadsheet I use, while the “expenses” lines stay the same. I get to see how much excess I’ll have left every month after I pay rent, utilities, and the rest of my bills. If you truly dislike budgeting, or just want to make it a little more interesting, consider using a budgeting app to spice up the process and get helpful hints and tips along the way.
Now that you know how much your income is versus your expenses, you can move on to step two.
Step 2: Pay off debt
Okay, stay with me here. Debt payoff was likely not part of your raise fantasy, but it really should be. If you’re carrying high-interest debt like a credit card balance, you should prioritize getting it paid off with the extra money you’re bringing in now. Credit cards charge a lot of interest on balances carried forward; their average APR hit 19.04% in November 2022. There are several ways to pay off debt. Personally, I had a lot of success with the debt snowball method, and if you’re the kind of person who likes seeing a lot of progress quickly, I recommend it. If you’ve got that larger salary in hand, start today — you won’t regret being free of high-interest debt.
Step 3: Open a new bank account
How would you like to earn even more money on your money? Only 21% of American adults currently have a high-yield savings account, and now is a great time to join those ranks. The best high-yield savings accounts are paying 3% or more in interest right now, so the money you stash in one is going to generate even better returns than if you left it in your checking or even a traditional savings account. So increase that “savings” line of your budget and funnel that extra money into a new bank account to enjoy the miracle of compound interest.
Step 4: Beware of ‘lifestyle creep’
A word of caution, before you start splurging on purchases with your new income: Don’t fall victim to lifestyle creep. Lifestyle creep is when your earnings increase and so does your spending, thereby leaving you living paycheck to paycheck again, despite making more money. This is where re-evaluating your budget can really help. You can build in a higher number for fun, guilt-free spending. This way, you benefit in multiple ways from making more money, rather than ending up back in the same situation as before.
Step 5: Focus on your long-term goals
Finally, start making some long-term goals, and keep them in mind whenever managing your money starts to get you down — or you feel the urge to make a big purchase without truly thinking it through. Your goals can be anything you want — early retirement, going back to school, taking a big vacation, buying your dream car. For me, it’s buying a house. Think about your big money goals often. Write them on sticky notes and leave them in places where you’ll see them. If you keep them in mind, you’ll be more likely to do what’s necessary to achieve them.
Congratulations on your salary increase! With these five steps, you can ensure your money benefits you and your life to the greatest degree possible. After all, isn’t that what it’s all about?
Alert: highest cash back card we’ve seen now has 0% intro APR until 2024
If you’re using the wrong credit or debit card, it could be costing you serious money. Our expert loves this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
