Did the New Year bring you a pay raise? When I meet with clients who are enjoying such a boost, I ask about their plans for the extra cash. It’s tempting to have fun with it, to treat it like a windfall. However, my independent financial advisor self knows that even a modest increase can be used more wisely for long term benefits.
FINRA suggests these four smart uses for the extra cash that comes with a raise.
1. Pay Down Debt
An increase is an opportunity to chip away or eliminate high-interest debt, such as credit card debt. Few money-management strategies pay off as well as, or with less risk than paying off all of your high-interest debt. Chipping away at high-interest debt can save you hundreds, even thousands of dollars in the long run.
2. Boost Your Emergency Savings
If something unexpected came up, like a medical or car expense, could you come up with $2,000 within the next month? About 34 percent of Americans probably or certainly could not come up with that money, according to a study by the FINRA Investor Education Foundation. And 54 percent of Americans don't have enough saved in "rainy day" funds to cover three months' worth of living expenses. If you've been procrastinating on establishing an emergency savings fund, your pay raise could be a great motivator to get serious about saving for the unexpected.
3. Increase Your Retirement Contributions
A pay raise can be an opportunity to put additional money into your retirement savings. If your employer offers to match your contribution, one wise way to use your raise is to increase your own contribution to take greater advantage of your employer's match. When it comes to matches, it's rarely a good idea to leave free money on the table.
4. Invest in Your Future
Saving for retirement is always a solid financial goal, but most of us have other financial goals, too. Your raise could be a step toward achieving them. Make a list of your financial goals and estimate how much each will cost.
Want to go on a fabulous vacation? Get a degree? Buy a house? Save for a child's education? Write it all down. Then, separate your goals into categories—short, medium and long-term—and set up savings and investment accounts for each one. It's easy to think you're saving enough money, but keeping separate accounts allows you to keep track of exactly how close you are to achieving each goal.
You don't have to do this on your own. I can help you develop a financial management plan that is compatible with your budget, your current situation, and your lifestyle goals. You'll be surprised at how small changes can make significant differences in the way you manage your finances.
Source: Alert Investor
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.