So, you got a raise at work. First, congratulations! Except when a raise bumps you up into the next tax bracket, there is never anything wrong with a little extra dough in your paycheck. But, the looming question remains: what are you going to do with it?
Most of us tend to spend it, but that quickly turns into a vicious cycle of "lifestyle inflation," effectively destroying our chances of building serious wealth. Instead of spending that extra cash, consider these five ways to put that raise to good use.
Source: Huffington Post
Although we are primarily talking about saving that raise, there is also nothing wrong with celebrating your successes at work...provided that those celebrations aren't saddling you with more debt, more stuff or more responsibilities. If you want, take a small portion of your first raise and do something with it. Pick up a Starbucks latte or try one of their new Cold Brew beverages on the way to work. Grab that bag of chips that you wanted to try. Dine out! But remember, don't blow your entire raise, and understand this is only a one-time celebration. It's not something you'll do every paycheck. Do it once. Only once. That's what makes it so special. It no longer becomes so special if you "celebrate" all the time.
It's not glamorous to pay off debt, but the instant that you become debt-free is a feeling unlike any other. Investments aside, being debt free (especially credit card debt!) sets the foundation for future wealth. It means that you get to keep everything that you earn. Every paycheck, your wealth continues to build. You get closer and closer to the point where retirement is a legitimate option. Pay off high-interest debts first, then switch over to paying off low-balance accounts to finally eliminate those debts altogether.
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Never pass up a golden opportunity to throw extra money into your retirement accounts. The more that you have saved, the earlier you can retire and finally start living your life on your terms. After a small celebration and paying off high-interest debts, direct extra money into your investment or savings account. If you have a company-sponsored 401k, this is a good target to choose for extra cash.
Many Americans don't have a pot of money set aside for emergencies. This is money that is typically outside of your normal bank account and is reserved specifically for unanticipated expenditures, like medical bills, car repairs or even job losses. If you don't have an emergency fund, build one with your raise. Each month, devote a portion of the raise amount directly into your emergency fund and let it build over the months. How much do you need? Many people consider 6 months of living expenses to be a good number, but others feel more comfortable with closer to a year's worth. Ask yourself: could I live comfortably for at least 6 months if I lost my job today? If the answer is no, start (or pad) your emergency fund.
Source: The Job Network
Lastly, consider doing nothing for a couple months. Use this time to evaluate your needs and what your financial picture looks like before making any decisions about where your new money will go. It's much better to delay for a little while than it is to make a rash decision. Unless you have pressing needs or extenuating circumstances, there is nothing wrong with waiting a little bit before deciding on what to do with your raise.
Do these five things over the years of pay raises and watch your wealth truly take off. Be smart with your money and think about where you want to be in the near future. It's okay to celebrate your achievements, but be sure to balance that with setting yourself up for a lifetime of success.