Whether you’ve negotiated a well-deserved raise or received that long-sought-after promotion, congratulations! A raise is a nice boost to your bank account and it can be a definite financial game changer if you manage it wisely. Here are five smart money moves to consider making with your new raise.
Get the Easy Wins…
1. Build an Emergency Fund
If you don’t already have an emergency fund, building one should be a top priority. Did you know only 39% of Americans have enough saved to cover a $1,000 emergency? If you’re sitting on less than $1,000 in your savings, consider using your raise to get an emergency fund started. Strive to save between three and six months’ worth of your living expenses.
2. Pay Off Debt
A raise can be the perfect opportunity to start tackling any debt. When you pay down debt, you’ll save more in the long run by spending less on interest. You might also find that your credit score improves when you pay off debt. Credit cards have notoriously high interest rates so consider paying off any high interest rate or making larger payments to pay off that debt sooner. Use this calculator to help determine how quickly you can pay off your debt if you increase your payments. While paying down debt may not be as exciting as a shopping spree, it can help reduce your money-based stress.
3. Retool Your Budget
When your income increases, you need to take a look at your budget again. But, before you allocate that money from your well-deserved raise, wait a few weeks. You’ll want to look at your paychecks to see how much of that raise you’re really getting. You may be surprised to see that you’re not getting as much as you initially thought because of taxes and other deductions. When you retool your budget, allocate a portion of your raise for savings and consider paying more on any debt. If you don’t update your budget to reflect your increased income, you might be more likely to spend that money on things that you don’t really need.
5 Budgeting Myths You Need to Stop Believing Right Now
Think a Little Bigger…
4. Up Your Retirement Savings
Increasing the amount you’re saving for retirement with money you’ve received from a raise is possibly one of the best decisions you can make after you receive a raise. Using this extra income to increase your monthly retirement contributions, even by just 1 percent, can have a dramatic impact on the stability of your financial future. If you aren’t already contributing the maximum to your employer-sponsored 401(k) plan, use your raise to increase the amount you’re contributing.
If you’re already maxing out your employer sponsored 401(k), consider opening an Individual Retirement Account (IRA) or purchasing an annuity. An IRA can be a great tool to supplement your 401(k) contributions. There are two types of IRAs available:
- Traditional IRA: A traditional IRA might allow you to get the benefit of a tax deduction on the contributions you make and you won’t pay any taxes on your contributions until you begin making withdrawals in retirement.
- Roth IRA: You won’t get tax deductions with a Roth IRA but it can work to your advantage if you expect your income to increase over time. Withdrawals on Roth IRA contributions are always tax-free.
- You Asked: How Much Should I Save For Retirement?
5. Purchase Life Insurance
If you’ve been holding off on purchasing life insurance because of those monthly premiums, obtaining life insurance after your raise should be at the top of your list. Though not pleasant to think about, planning for your family’s future now can help protect them and keep them financially secure if you’re not there to take care of them. And, with the right type of policy, you may also be able to use the accumulated cash value to finance a college education, fill in the gaps of your retirement income, purchase a home or pay other expenses.
Use this calculator to estimate your life insurance needs now!
A Raise is Just the Start!
Whether you’re using your raise to pay off debt or pad your retirement fund, a local Farm Bureau agent can help you make confident decisions about your financial future.