Rushing home to update your budget probably isn't the first thing you think of when celebrating a raise. However, knowing how best to allocate surprise income is one of the most important steps to long-term financial security.
Simply put: Women often face greater daily and long-term expenses than men do, despite facing systemic pay disparity. So, when your hard work is rewarded with a higher salary, it's especially important to put that additional income to the best possible use.
Here are four tips for creating a new budget (or a first budget) after a raise, to help ensure your extra income has the greatest impact possible:
1. Understand where you spend money
The most successful budgets are those that help you apportion and track your spending. Writing down what you spend over the course of a few months will be enlightening.
And, it's easy to do: You can simply take a small notebook and write down every cent you spend every day or, use an online spreadsheet (like Excel or Google Sheets).
To make it even easier, use a budgeting app (like Mint), which will track and categorize your spending on all of your debit and credit cards.
This step is especially important if you're budgeting with a partner who tends to take the lead in financial matters. In the past, married men often earned more or fully supported their wives and families, putting women at a steep financial disadvantage in the event of a major life change such as death or divorce. In order to be financially independent, and secure in the event of an unexpected hardship, women need to be fully aware of their earning, spending and saving habits.
2. Categorize your spending
When you get a raise, the temptation is to spend more because more cash is coming in. But, breaking down your spending allows you to see the waste in your budget and will give you ideas about how to redirect those expenses into something more productive, like your retirement savings or a simple emergency account.
Try these methods for categorizing your spending:
- High-level categorization. There are about 10 primary categories of spending. These are: housing, utilities, transportation, food and household supplies, health care and insurance, clothing and personal expenditures, entertainment, cash spending, miscellaneous debt, and education. As you review your spending history, sort your expenses into these categories to see where you're really spending your money.
- Envelope and cash system. Not big on debit or credit cards? Take a bunch of envelopes and write out your major expenses for each month, including rent or mortgage, food, utilities, transportation, insurance, education, child care, or any others. When your paycheck comes, apportion enough cash into the envelopes to pay the bills, and then put the rest in the final envelope, "savings." While this method has obvious limitations, after a month or two, you should be able to see your spending envelope grow and then transfer that cash into your bank account.
- Sen. Elizabeth Warren's 50-30-20 budget. The 50-30-20 plan breaks your budget down into needs, wants and savings. You should be spending no more than 50% of your budget on day-to-day expenses necessary for survival, such as food, rent, child care and utilities. No more than 30 percent of your budget should go into non-essential wants, such as that new purse you've been eyeing, traveling, and splurging a little for entertainment such as a movie or dining out. Finally, at least 20% of your income should go into savings, whether for retirement, your "rainy day" or emergency fund, or debt repayment.
3. Pay attention to where you may be overspending
Remember, your budget should be accounting for post-tax income, not pre-tax. In other words: Base your budget on your take-home pay. If you find that you're getting to the end of the month with almost no cash left, you need to find ways to either spend less or bring in more income.
Some areas women can cut spending include:
- Avoiding items affected by the "pink tax": everyday items that cost more when marketed to women (hygiene products such as razors, deodorant, shampoo, etc.) and opting for generic or store brand versions instead
- Canceling a rarely used gym membership
- Making your own coffee rather than hitting Starbucks
- Finding a cheaper cell plan
- Cutting back on subscription services, like Netflix, Audible or music streaming services.
4. Bank your raise (and any tax refunds)
At the end of the day, getting a raise shouldn't make you feel free to spend more. Women generally live longer than men and may need more substantial retirement and health care savings over time. Often the best way to build financial stability is to bank any raises and tax refunds you get for the future.
You can bank your raise in any number of ways:
- Up your 401k contribution.
- Direct your employer to do a payroll deduction into a separate savings account..
- Use your extra take-home pay to contribute to a Roth IRA.
- Pay down (or off) credit card debt or your student loans.
Remember, you've been managing just fine on your old salary. Banking your raise will allow you to focus on your financial future.