Learn how to get the most out of your extra income to improve your financial wellness and put your money to work.
You’ve just landed the raise that you hoped for, and your first instinct is to think of all the nice things that you can now do with the money. It’s a common mistake that people make when dealing with a larger paycheck. It’s important to think carefully about how best to use your newfound wealth.
Beware Of Lifestyle Inflation
When you raise your standard of living to keep up with your pay increases, you succumb to the temptation of lifestyle inflation. When you plan lifestyle expenses to mop up all the extra money you make, you don’t leave anything behind for other, more essential needs. The best thing to do is to think of ways to save more and resolve only to use a small part of the extra money on indulgences.
Contribute To Your Retirement Plan
Your retirement savings should get a fixed percentage of your salary. So the least you can do is to maximize your contribution to your 401(k). You might even sign up to auto-escalate your 401(k), a feature that automatically keeps your contributions in line with your salary.
Create An Emergency Fund
Every adult needs an emergency fund. An emergency fund, or “rainy day fund”, gives you a financial cushion to handle emergencies like car repairs or your pet’s surgery without going into debt.
Pay Down Your Debt
Whatever debt you may carry; old student loans, credit cards, car, or home, it’s important to do everything you can to pay it down as quickly as possible. It can help to allocate a sizable part of your raise to pay off these debts. Typically, your debts should get precedence over even saving money, as long as you already have an emergency fund established. This is because the interest you pay on your debt is usually much higher than the returns you see on your savings or investments.
Sacrifices To Make
While a raise can be great, usually, it comes with a trade-off; you may have extended work hours or be on call for longer each day. It’s important to realize that the extra money usually comes with added responsibilities. Don’t let the added money entice you into a position you’re not ready to take. Carefully consider the pros and the cons, and talk to your manager before accepting the raise.
Don’t Assume That There Will Always Be Raises Coming
Raises usually come in bigger jumps at the beginning of your career than they do later on. A 10% raise may come when you make minimum wage; it can be much harder to come by a $5,000 raise when you make $50,000 a year. It’s important to understand that at some point, the graph is bound to level off. It would help if you kept possible future salary levels in mind when deciding how much to spend versus how much to save.
If you’re someone who isn’t comfortable around the subject of money, it’s important that you bring a financial advisor into the picture as early in your life as possible.
Millions of people neglect to save enough and regret it when they retire or when financial emergencies turn up. A raise is an excellent opportunity to ensure your financial security for the future. It’s important not to let the opportunity go to waste.