You just received a salary increase. Here’s what you can do with the extra money

How to manage a salary increase

Getting a raise is something worth celebrating! Whether it came from a new role, a standout review or hard-won career progress, it’s a recognition of your hard work and a chance to take a breath.

It’s also a good moment to think about the bigger picture. Extra income can make room for more of what you want right now. But with a little planning, it can also help set you up for continued success down the road: more savings, less financial stress and a better shot at your long-term goals. The key is putting a few strategies in place early, so your income keeps working for you long after the glow has worn off.

Identifying your financial priorities

Short-term needs

We all have dreams for our future, whether they’re big ones like starting a business, getting a new degree and buying a home, or small ones like going on more frequent vacations with your family. Building savings, not just income, is a core function of accomplishing those dreams.

If you don’t know what to do first with that extra income, start with the basics. It’s hard to build wealth on a shaky foundation. Consider taking steps to make yourself more resilient against potential short-term setbacks and surprises as a prelude to your longer-term goals like retirement.

Paying off high-interest debt

Credit cards and other loans with high interest rates can be hard to get ahead of. These high interest rates can compound and eat away at your wealth faster than most investments can grow it. Using some of your raise to chip away at these balances may lower your monthly costs and reduce what you pay over time.

If you have different types of debt and don’t know what to address first, there are two common approaches called the snowball method and the avalanche method. It often comes down to interest rates and how much you owe.

Building emergency savings

Emergency funds are what help you avoid going into debt when something goes wrong. If yours isn’t built up or doesn’t exist yet, this may be one of the most practical places to direct your extra income. Many people aim for at least three to six months’ worth of essential expenses in savings. Even one month is better than none. This can be a valuable buffer for unexpected repairs, health care costs or if you find yourself with a few months between jobs.

Long-term financial goals and avoiding lifestyle creep

Achieving your long-term financial goals requires the discipline to direct your extra income to savings and investments. However, with more money coming in each month, it’s easy to quietly increase your expenses to match your new income. Sometimes it’s big things like a new car. Sometimes it’s smaller patterns that add up, like eating out more often.

A recommended way to avoid lifestyle creep is to set aside money for savings and investment goals before the raise becomes part of your baseline spending. Automating transfers from your checking account into special savings accounts or directing portions of your paycheck into retirement accounts can be a great tool to put those savings on autopilot. Spend on your future first.

What to do with the extra money from a raise

Saving and investing are key to accomplishing your short- and long-term financial goals. Saving typically means setting money aside in a bank account for short-term needs. It’s low risk, easy to access and good for goals like building an emergency fund. Once you’ve covered your short-term financial needs by paying down debt and/or building an emergency savings fund with three to six months of living expenses, you can shift your focus to long-term financial goals and how to realize those goals through investing. In contrast to saving, investing involves buying assets like stocks, bonds, mutual funds or exchange-traded funds (ETFs) that have the potential to grow over time. It usually comes with more risk and more opportunity, making it a better fit for long-term goals like retirement.

Savings options

Savings accounts and money market accounts both let your money earn interest while staying accessible. These accounts are Federal Deposit Insurance Corporation (FDIC)-insured and may be useful for goals like building an emergency fund or saving for a home. While savings accounts tend to have lower minimum balance requirements, money market accounts often provide added flexibility like check-writing or debit card access. This comparison of savings and money market accounts explains how to weigh the tradeoffs.

You might also consider:

Putting more of your extra income into one of these options may help you earn more interest than a checking account alone and support your goals without taking on investment risk.

Investment options

If your financial foundation is in place, investing can help you grow your wealth over time. That could mean contributing more to a retirement account such as a 401(k) through your employer or an Individual Retirement Account (IRA). You might also consider opening a general investment account for broader goals. In addition to account type, you should consider how you want to invest; do you want to do it on your own or work with an advisor.

There’s a wide range of investment products, from individual stocks and bonds to diversified options like ETFs and mutual funds. Funds can be actively managed by a professional manager or passively track an index and may help reduce risk through built-in diversification. You can also consider allocation funds, which blend stocks, bonds and cash into one package.

For investing goals outside of retirement, general investment accounts offer flexibility with fewer restrictions. For education-related goals, 529 plans, Coverdell Education Savings Accounts (ESAs) and custodial accounts like Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts can provide different benefits.

Each account type comes with its own tax rules, contribution limits and flexibility. You can explore how they fit together by learning more about investment account types.

Keep in mind that all investing involves risk, and returns are never guaranteed. That’s why many people match investment choices to time frame and comfort with market swings.

Implementing a personalized financial strategy

Once your priorities are clear, the next step is turning your raise into a repeatable strategy.

One helpful approach is to connect your income to goals through a portfolio mindset. A portfolio doesn’t have to be complicated. It’s just the collection of your accounts, including both savings and investments, that support your financial objectives. The key is figuring out what those objectives are, what your milestones are and how much risk you’re comfortable taking to get there.

For example, if your goal is to buy a home in five years, that may call for a lower-risk approach with easy access to funds. A retirement goal that's 30 years away may allow for taking more risk with your investments, given the longer time horizon. Matching your savings and investment vehicles to your goals and timelines helps bring structure to your plan.

From there, consider automating the pieces. When savings and investment contributions happen on a schedule before money hits your checking account, it’s easier to stay consistent. That could mean monthly transfers to a high-yield savings account, recurring 401(k) contributions or an automatic investment plan through a brokerage account.

A strong financial plan is built to evolve. Goals shift. Incomes change. Checking in periodically on your progress, your priorities and your comfort with risk can help keep your plan aligned even as life moves forward.

The bottom line

A salary increase is more than just extra cash; it's an opportunity to strengthen your financial future. By exploring various savings and investment options, you can make informed decisions that align with your financial goals. Taking proactive steps now can lead to greater financial security and growth in the long run.

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