Turn your pay increase into financial security

Congrats on your new job or salary increase! Whether you've earned a promotion from your employer or landed a job with a higher salary, it's a good feeling to be recognized and rewarded for your work.

You should get more than a confidence boost if you play it right. You can also use that extra income to increase your financial security and give yourself a better chance of realizing your long-term goals. With some strategic decision-making, that pay raise could be your first step toward financial peace of mind.

Update your budget with your new income and monthly expenses.

If you're like most people, you can probably think of a million ways you'd like to spend your money. When you get a raise, you may be tempted to see that extra income as more spending money — a natural instinct, but not particularly helpful in the long run.

To help you prioritize your spending, revise your budget so it reflects your new income. If you're not already, consider using an online budget tool or a budget worksheet to track your monthly income and expenses. This will help you get a clear picture of where your money's going each month and how much you'll have left.

It's always a good idea to look for areas where you can cut back. Maybe you subscribed to a new service a few months ago, for example, but aren't using it as much as you expected. You may be earning more, but that doesn't mean you should stop trying to find ways to save.

Once you've updated your budget, live by it. As long as your expenses haven't increased along with your income, you should have some extra money and some decisions to make about what to do with it. Depending on your current financial situation, you may want to allocate most of it toward paying down debt or increasing savings.

Build, or rebuild, your emergency savings.

A fully funded emergency account is the backbone to financial freedom. What does fully funded mean? Typically, it means you've saved enough money cover your living expenses for three to six months.

If this pay increase is because of a new job, you may have experienced a period of unemployment. In that case, it's possible that you lived off your savings and need to restock your emergency fund. Even if you transitioned quickly from one job to the other, it's smart to reevaluate your preparedness for unexpected expenses.

It may seem backward to focus on saving before paying down debt. However, if your refrigerator dies and you must replace it, you don't want to be stuck making a big purchase on a high-interest credit card when you could be paying for it outright. Any existing credit card debt will just get harder to pay off.

If your emergency account is nowhere close to covering three to six months of expenses, don't get discouraged. Start with an initial goal of $1,000. Set aside as much as your budget allows, even if it's just $25 a week, and you'll get there over time. You can also set up automatic transfers to take place every two weeks, or once a month, so you can save without having to think about it.

Once you have your emergency fund, you can reprioritize and reallocate that money toward paying off debt. Or you can increase contributions toward other savings goals. You may want to save for a down payment on a new home, a wedding, future childcare expenses or a vacation. You may even be balancing all these priorities at once.

Only you and your family can prioritize your savings goals. It's a delicate balance deciding how much you can afford to contribute each month.

It helps some people to open a separate account for each major goal and name each account according to its intended purpose. This makes it easier to track your progress.

Use your new income to pay down debt.

Any time your income changes is a good opportunity to revisit your debt repayment strategy. That extra income may give you an opportunity to pay off some small balances quickly, which can help you build momentum and make tracking your debts easier. Alternatively, you may use that money to increase your payments toward high-interest balances and save money in the long term.

If you're not sure where to start first, use a debt worksheet to get an overall view of your debts. Work the minimum payments into your budget and see where you can afford to make extra payments.

One option might be securing a personal loan to pay off your debt. Do some research on the various ways to pay down debt and choose one that helps you pay off your loans quicker and save you money.

If you're not carrying much high-interest debt, you can still use your extra income to your advantage. Try making extra payments toward your home mortgage or auto loan to pay them off faster and ultimately reduce your interest burden. That is, after all other financial goals are being met, like retirement.

Increase your retirement savings.

If you don't think you're as prepared for retirement as you should be at your age, you're not alone. The Federal Reserve's 2022 Report on the Economic Well-Being of U.S. Households reported that progress toward retirement savings goals declined in 2022. In fact, only 31% of non-retirees felt their retirement savings was on-track, down from 40% in 2021.

Consider setting aside at least 10% of your income for retirement. This may seem unachievable, especially if you're just starting out. Remember that starting small is better than waiting to start. Begin by contributing 3% to 5% and increase it by 1% to 2% each time you get a raise. You'll get there before long.

If your employer offers a matching contribution through its retirement plan, sign up and contribute at least enough to maximize the employer match. This includes the military's Blended Retirement System. Matched contributions are free money that you don't want to leave on the table.

Set aside money to treat yourself.

There's a French proverb that says, “Little by little, a bird builds its nest.” That's also the case with your finances. You've worked hard, so you should also be sure to reward yourself. If you can afford it, carve out 5% to 10% of your pay raise each month to spend on things that make you happy.

If you can't afford the monthly expense, use a little bit of the pay raise to treat yourself to something. Whether you spend it on a new outfit, a massage, concert tickets or a nice dinner with friends and family, that's up to you. All that matters is that it brings you joy. You've earned it!

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.