How to make the most of a pay raise

A significant salary hike — whether due to a promotion, new position, or stellar performance — is a major win. It boosts your confidence, fattens your wallet, and recognizes that you’re a high-value contributor.

When you get a raise, as happy a moment as it is, it can bring some complicated questions. There is a wide range of possibilities you could spend this money on, including paying off credit card debt, maxing out your 401(k), or treating yourself to a purchase or an experience — because after all, you’ve earned it. But how you spend this money can impact your financial health. Financial advisors often warn about lifestyle creep, which is when your spending increases along with your household income. If this happens there may be little money left to go into savings. That’s why financial advisors recommend paying yourself first and then paying down debt so when you indulge in lifestyle spending it can be done without guilt.

Research shows that financial health — or lack thereof — has an outsized impact on a person’s overall well-being. And only 32% of Americans say they’re good about setting up and sticking to a long-term financial plan.¹ With that in mind, here are a few tips to help you manage more money in a way that’s both productive and protective.

1. Plan for taxes

Do this first, because a $10,000 raise on paper may only net out to $7,500 or so in your pocket, depending on your tax situation. People often overlook the tax liability on a pay increase so it’s wise to talk with HR to increase your withholding or, if you’re self-employed, set aside more money for taxes.

2. Update your budget

If you don’t already have one, it’s time to create a budget. It doesn’t need to be something complicated. In fact, the simpler your budget, the more likely you are to follow it. Increasing your awareness of your spending and categorizing your expenditures based on the level of importance can help you become more confident with your finances. Having this greater insight into your spending likely enables you to thoughtfully cut spending during hard times — or treat yourself without guilt during the good.

One way to simplify your budget is to use the 50/30/20 concept. It’s a customizable recipe for living within your means, staying out of unwanted debt, and having confidence in your financial well-being. Following this plan, each month you allocate 50% of your take-home dollars (after-tax income) to your mandatory expenses (e.g., housing, utilities, groceries, insurance, and transportation), 30% to wants (e.g., eating out, travel, and entertainment), and 20% to savings. The plan should be simple but still flexible. You should revisit and adjust your budget as changes arise, such as getting a raise.

3. Pay yourself — but keep it on your balance sheet

Convert 15% to 20% of the increase into a wealth-accelerator by funneling the money into an asset, such as a savings account. This is a crucial point. Don’t confuse rewarding yourself — spending money on an indulgence with little or no lasting economic value — with paying yourself. Paying yourself is about putting a portion of your raise into an asset that will keep the money working to help optimize your financial future. The first thing to look at is building an emergency fund. Experienced financial advisors typically recommend having enough emergency savings to cover your living expenses for nine months, or more — a year’s worth of income is ideal. With a robust emergency fund sitting in your bank, you are likely to feel more confident in your ability to weather whatever life throws your way.

This advice can be difficult for younger people: Only 29% of Gen Z say they are pretty good at setting up a long-term financial plan and sticking to it.² The initial thought of many professionals in their late 20s and early 30s may be to apply the entire increase toward chunking down debt or buying something shiny and nice.

4. Spend on what you want

Now that you’ve done the sensible things — planned your taxes and added to your assets — you get to indulge your emotional needs. Maybe financial confidence is your top priority, and you want to pay down debt. Financial advisors will tell you to be strategic on how you pay down debt. For example, look at the interest rates and the balances on credit cards. Consider paying off the card with the higher interest rate and keeping the balance on the one with the lower rate.

But if you want to take a trip or buy a new wardrobe, that can be ok too. Some financial advisors will tell you that if you work hard, it’s ok to play hard too as long as you pay yourself first.

A pay raise is a good time to check in with your financial advisor or start working with one. I can help you look at the big picture — your goals, responsibilities, income — and ask the tough questions. That perspective can help you make an educated decision on how to disburse your money.

Disclaimer:

1 Mind, Body, and Wallet® 2025: What’s your well?: How Americans define well-being, Guardian, 2025, https://www.guardianlife.com/reports/mind-body-wallet
2 Money Moves: Preparing for the great wealth transfer, Guardian, 2025, https://www.guardianlife.com/reports/money-moves

This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial professional for guidance and information that is specific to your individual situation.

“Financial advisor” / “advisor” is used generally to describe insurance/annuity and investment sales and advisory professionals who may hold varied licensing as insurance agents, registered representatives of broker-dealers, and investment advisory representatives (IAR) of registered investment advisors, respectively. Only those representatives who use advisor in their title or otherwise disclose their status and meet the necessary licensing or registration requirements provide investment advisory services.

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