A pay raise or bonus opens the door to extra spending money, but it can also help you create a stronger financial future. This guide walks you through a plan to make the most of increased income, from growing your savings and managing expenses to investing with purpose. When you know what to do with a pay raise, you can turn that money into long-term financial stability.
What does it mean to get a raise?
If you get a pay raise, your salary or hourly rate increases. A bigger paycheck is welcome news, but the true impact depends on how much of that increase reaches your bank account after taxes and deductions.
That’s where gross pay vs. net pay comes in. Your gross pay is the amount you earn before deductions, such as taxes, insurance, and retirement contributions, are taken out. Net pay, or take-home pay, is what arrives in your account and can be used for spending or saving.
The same concept applies to a bonus allocation. A bonus is typically paid as a gross amount, but taxes and deductions are taken out before that money reaches your bank account. The amount you receive is your net bonus, which you can put toward your financial goals.
There’s no universal definition for what’s considered a good raise. The right increase depends on your industry, experience level, job performance, and the local cost of living. A raise that feels substantial in one situation may only offset inflation in another.
Some people use benchmarks like the 7-3-2 rule to track career progress. This rule suggests aiming for a 7% annual pay increase, a 30% salary increase every three years (usually through promotions), and a doubling of total compensation every decade. Even though it’s not a guaranteed path, the 7-3-2 framework offers a simple way to see whether your earning potential is moving in the right direction.
Another benchmark is the $1,000 a month rule, which connects retirement planning with investment savings. It estimates that every $1,000 in monthly retirement income requires roughly $240,000 to $300,000 invested, based on an assumed 4% to 5% withdrawal rate. The assumed rate is not guaranteed and actual results vary with market performance.
This is a general guideline since needs vary based on spending habits and investment performance. Still, it provides a way to estimate how much you need to save to support your desired retirement income.
Budgeting after a raise: Step-by-step plan
A higher salary gives you more financial breathing room, but that money can disappear quickly without a concrete plan. Rather than letting a raise blend into your everyday spending, use it to build your wealth.
The best place to start is by addressing your current priorities before putting extra money toward future goals. Here’s a three-step plan for what to do when you get a raise at work.
1. Pay down debt first
Begin by eliminating high-interest debt, since those balances can limit your financial flexibility and hold you back from achieving your goals. Credit cards and personal loans often come with high interest rates, which cause balances to grow faster over time. Using part of your raise to tackle debt reduces this financial pressure and frees up your income for saving or investing later on.
2. Build your emergency fund
An emergency fund provides a financial safety net when unexpected expenses arise, such as medical bills, car repairs, or a sudden loss of income. Most experts recommend keeping enough savings to cover three to six months of essential living costs.
If you already have an emergency fund, you can check this step off and focus your increased income on other areas of your financial plan. If not, directing part of your raise to this cushion helps you handle surprise costs without relying on credit cards or loans.
3. Direct money toward long-term goals
Once you’ve addressed debt and established an emergency fund, your raise can start supporting your long-term goals. This is the point where you shift from reacting to immediate needs to actively building wealth and security.
Consider putting your money into retirement contributions, investment accounts, or income-oriented holdings such as Treasury securities or dividend-paying stocks, noting that bond prices fall when rates rise and dividends are not guaranteed. This approach puts the increase to work, though unlike a savings account these holdings carry risk to principal.
The $1,000 a month rule puts this into perspective. As an illustration, a $240,000 portfolio at an assumed 5% annual return would produce $12,000 over a year, or $1,000 a month before taxes. Returns are not consistent year to year, the assumed rate is not guaranteed, and this is not a projection of results. Directing part of a raise toward savings can help build that balance over time.
A Gainbridge Flex℠ Annuity credits a guaranteed fixed rate for a stated term and can later be converted to income.
What to do with bonus money
A bonus arrives as a lump sum rather than increasing your regular income. Since you won’t receive this money every month, it’s an opportunity to make progress on larger goals. This might mean clearing a balance or making a significant investment contribution. You can also follow the same approach you would with a raise by paying down high-interest debt or bumping up your emergency savings.
It’s also reasonable to enjoy part of your bonus. The key is deciding how much you want to spend versus how much you want to save. This approach helps you enjoy the reward without losing the chance to strengthen your financial future.
Allow yourself to enjoy your pay raise
Earning a pay raise reflects your hard work and the value you bring to your role. While it’s important to use that extra income wisely, you don’t have to direct every dollar to a financial goal.
Set aside a portion of your raise to reward yourself, whether that’s booking a trip, treating yourself to a special dinner, or finally buying something you’ve been putting off. Enjoying part of your additional income can be part of a healthy financial plan as much as saving or investing. Plus, leaving room to celebrate your progress can make your plan more sustainable in the long run.
Grow your money with Gainbridge Flex℠
A pay raise offers more than extra money each month. It gives you a chance to strengthen your financial future. When you have a clear plan for that increased income, you can reduce stress today and create stability for tomorrow.
To review the current rate, visit Gainbridge Save℠. No sales commissions and no annual contract fee are charged; surrender charges and any market value adjustment apply as described in the contract.
This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The Gainbridge Flex® digital platform provides informational and educational resources intended only for self-directed purposes.
