You finally got a raise — and it’s a big one. While it might be tempting to splurge on big-ticket items or a vacation to Europe, all the best financial experts will tell you: don’t do it. There are many ways to protect your windfall, from micro-budgeting to maxing out your 401K: here are eleven budgeting tips to save when you get your big raise.
1. First, figure out what you spend every month
Use a budgeting app like Mint.com or Wave to get a blow-by-blow of everything you spend, from essentials (rent, health care) to expendable income (dining out, entertainment). If you don’t feel comfortable attaching your bank information to the apps, you can always use a home budget calculator on Vanguard’s website or use Nerdwallet’s budget worksheet.
From there, you can see how much more money you will have left from your raise after you pay all of your expenses. Once you get a sense of your windfall, it’s time to learn how to protect it.
2. Identify your savings needs
Are you saving for a house? Already own a house? Would you rather take all that extra cash and put it toward retirement? Maybe you’d rather travel as much as possible. Do you have kids and need to save for their education? Maybe, you’d like to do a little bit of all of the above. Look at the windfall and determine what your priorities are and take action.
3. See a financial advisor
If you are still on the fence about the best way to protect your newfound windfall, see a financial advisor. For a full workup, a financial advisor can cost as much as $1000-$2000 for a complete financial plan. If you want someone who can guide you finances continually, you’d pay a monthly retainer of a few hundred a month, according to David Weliver at Money Under 30. NerdWallet has a breakdown of fees — explaining “most financial advisors charge based on how much money they oversee for you, a fee structure called “assets under management,” or AUM. That fee might range from 0.25% of your account balance to 1% or more, depending on the type of advisor you choose.” A financial advisor might not make sense if you don’t make above a certain amount of money or don’t have a huge nest egg; but if it does, once you are there, you can discuss the various options. But one thing is for certain, the financial advisor will likely tell you to save for retirement, which brings us to the next step.
4. Max out that 401K
If you are like many Americans, your full-time job has a great set of benefits which includes a 401K retirement package. It is recommended to contribute 10 to 20 percent of your income if you can handle it and don’t have other debts to cover. The maximum you can contribute pre-tax is $19,000. Many companies offer a company matching — meaning, they will match a percentage of your savings dollar for dollar. This is free money, it lowers your tax burden, and you should take advantage of it. For instance, a 100 percent match on a 10 percent contribution on $4,000 a month comes to $800 before taxes, only $400 of which comes out of your budget. Set that amount in your payroll withdrawal and forget about it. Be happily surprised when in a year you have a few thousand dollars in the bank and you didn’t even miss it.
5. Use budgeting apps
If you are having a hard time keeping track of your spending, use a budgeting app, which can set alerts when you go over an allotted amount. Mint.com, which has long been ranked as one of the best, already told you how you spend your money. It can also ping you with alerts when you go over certain spending goals. Another cult favorite is You Need a Budget, which slurps in your account info to get a big picture of your expenses, but it also allows you to set monthly goals for extracurricular stuff, too (like gifts or travel expenses.) Millennial Money Man has a good breakdown of the differences between the two (YNAB is not free, for one thing).
Like your 401K, you should automate everything. Automate the minimum payment on your credit card; automate monthly bills such as cell phone, internet, cable and health care premiums (if you have those to pay). You can even consolidate all of those automated bills to be drawn on a high-points reward credit card like a Chase Sapphire Reward or Reserve, which can earn you “points” for travel, thereby saving you even more money. Then, you have just one major payment a month (make sure to automate that payment for the full amount due, so you don’t ever fall behind.) It’s important to note: automating bills does not mean you can set it and forget it; always check your statements for weird expenses or line items. Automation will set your mind at ease that you won’t ever miss a minimum payment and incur interest of late fees, both key to protecting your assets. You can also automate your savings into your micro-budgeting accounts. What’s micro budgeting?, you ask. Read on to find out!
7. Micro-budget and use “digital envelopes”
Now that you are acclimated to automation, you can engage in micro-budgeting (with the help of YNAB, which can help you figure out your monthly saving amounts). It used to be you had a checking account and a savings account. But these days people are opening more than one savings account for different needs. A checking account serves as your main in-out thoroughfare, but there are several different savings accounts to consider. You can use a high yield savings account (some have an APY as high as 2.46%) for long term budgets for a large amount of money (if you are lucky to have that). That could be a good account type for your emergency fund or house fund, both of which should be less easily accessible that your regular savings account, which would be for more immediate needs and can easily be funneled into your checking account. If you set up amounts to be withdrawn from your bank account regularly, it’s likely you won’t even miss the money. And in some instances, if your employer offers direct deposit, you can do this at the outset — sending the bulk of your cash to your checking and split off the rest into your various accounts. (Be sure to research the fees for all these sundry accounts).
8. Make a digital penny bank
Several apps use the “penny bank concept,” such as Digit, which helps you allocate funds to different categories, and Acorns, which is an investment fund. With these micro-savings apps, you round up every purchase and put the excess into a separate savings account. So, if you spent, $5.15 on that coffee, .85 cents will go into an account. You can automate this to happen immediately and by the end of the month, you may be surprised at how much money you’ve effortlessly saved.
9. Don’t be afraid to borrow
Save even more money by borrowing and not buying. An ultra-frugality movement is taking hold amongst many high-earning millennials, in which they save every penny despite earning six figures. They borrow movies and books from the library rather than buying them, for example, and eschew the idea of the daily $5 latte. They don’t spend a ton of money on alcohol or dining out, and consider travel a splurge. They save, save, save, to have a nice nest egg well before retirement (This is dubbed FIRE — financially independent, retiring early). Their outlook is that paying for experiences, not material objects, is the goal. They also give to charity, calculating charities that will have the biggest impact per dollar given (a philosophy called Effect Altruism) Giving to charity is another way to lessen your tax burden.
10. Give to charity
Many in the EA movement set aside a huge chunk of their income for charity. Not just a few hundred dollars a year, but 5, 10, even 15 percent of their income. That might seem impossible, but now that you have extra income and you’re being extra responsible with it, you may be surprised by how much cash you have. Studies by the Bureau of Labor Statistics have found that households in the $75,978-$99,623 range have $30,424 left in discretionary income, some of which could go to charity.
11. Save for a splurge
All work and no play makes for a dull life, so as you are saving and scrimping, make one of your micro-accounts a fun one, which you can access for a trip you want to take, a new gadget you’ve been wanting to buy, or a shopping spree. You can now do so guilt-free, now, because you’ve protected your windfall from impulsive urges with a smart budgeting plan.
Writer and editor Tricia Romano is the former editor-in-chief of the Stranger. She has been a staff writer at the Seattle Times and columnist for the Village Voice. She is currently working an oral history about the Village Voice for Public Affairs. You can find her at Patreon.