Why Do You Need an Emergency Fund?
- Job loss or unemployment
- Medical or dental bills
- Home repairs
Landing a raise at work is a big achievement. Major kudos. It helps justify the job you are doing and makes you feel like a valuable part of your company. But salary increases are never guaranteed. They tend to be directly correlated to the success of the business and the economy. And let’s face it: It can be easy to get a raise at work and then continue living your life business as usual, without making the most of those extra funds.
When you get a raise at work, think about how you can really benefit from your increased earnings. Enjoy the success hard work has brought you, of course, but remember that it’s also important to continue to grow your net worth when deciding what to do with a raise.
When you get a raise at work, consider the following five ideas for that hard-earned money:
“After getting a raise at work, don’t immediately start spending your new money,” says Michael Banks, founder of the blog FortunateInvestor.com. “Instead, take a moment to assess your current financial situation and plan for future financial security.”
When you get a raise, start by figuring out how your boost in salary will affect your paychecks. Just because you’re going to be earning an extra $4,000 per year, for example, doesn’t mean that will be your additional take-home pay. You’ll need to factor in your tax withholding and any other deductions from your paycheck (think health insurance, commuter benefits, office gym membership). To determine your net pay increase when you get a raise, subtract your old paycheck from your new paycheck. This is the amount that should inform adjustments to your monthly budget.
“You want to get rid of high-interest debt as soon as possible. That interest will devour your hard-earned money.”
If you are working to eliminate debt, then when you get a raise it could be a great time to accelerate your efforts. Credit card debt, student loans, or even a car loan—the easiest way to build a positive net worth quickly is to eliminate any debt standing in your way. While reducing your debt load may not give you instant gratification like a treat-yourself splurge, just knowing you are debt-free (or moving in that direction) can be a major victory.
“You want to get rid of high-interest debt as soon as possible,” says Jackie Lam, founder of frugal blog Cheapsters.org. “That interest will devour your hard-earned money,” she adds.
“Paying off high-interest debts and creating an emergency fund are two great places to incorporate this increased income,” Banks says.
It’s never fun to think about an emergency that may require you to dip into your savings, but building, or beefing up, your emergency fund is one way to put your increased salary to work. When deciding what to do with a raise, think of an emergency fund as peace of mind if an unexpected cost does creep up. It’ll be there for you to fall back on if your water heater brakes, you need to have work done on your car or someone in your family loses a job. Most experts agree that your emergency fund should cover three to six months of living expenses. Place your fund in a savings account so you can have easy access in the event of an emergency.
When you get a raise, you can think about your golden years regardless of your age. “Using your windfall to increase monthly retirement contributions, even if just by 1 percent, can have a dramatic impact on the stability of your future financial standing,” Banks says.
One of the easiest ways to make sure your retirement account is getting the attention it deserves is to make it automatic. Determine how much of your raise you want to place into your IRA (Individual Retirement Account) or 401(k) every year, and then automatically have the maximum amount possible transferred each month. If your employer will match your contribution, take advantage of that opportunity to grow your savings at an increased rate.
You worked hard to earn your raise, so enjoy it a little. Set aside a portion of your increased income and #TreatYoSelf. Maybe you’ve had your eye on a new pair of shoes, or you’ve been waiting to pull the trigger on some new furniture for your home. You could even place a portion of your raise into a separate savings account to be used for vacations.
“Whenever I got a raise at work I’d put a small percentage of it toward my 401(k) contribution and saved the rest toward my monthly savings and short-term goals, like buying a new computer or going on a trip,” Lam says. “I was careful not to undergo lifestyle inflation.”
Getting a raise at work is cause for celebration—and identifying new financial opportunities. Deciding what to do with a raise when extra income comes in can lead to long-term benefits and help ensure your extra cash doesn’t disappear each month.
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1 Study by T. Rowe Price Retirement Plan Services.