Congratulations on getting a raise! Now, what should you do with your extra income? First of all, beware of lifestyle creep: raising your standard of living as your disposable income increases. This can be dangerous. Knowing what to do with a raise can help you make the most out of your new income. Use your raise to make these smart financial decisions.
1. Add to Your Retirement
One of the smartest things you can do with a raise is save for retirement. Your retirement fund will someday replace your salary, allowing you to maintain your lifestyle. Unfortunately, if you slip into lifestyle creep, you could spend all your discretionary income without saving enough, resulting in a lower quality of life in your later years.
Your retirement contribution should increase when your income increases. Many retirement planning tools, like a 401(k), draw retirement savings directly from your pre-tax income. This means that when your salary increases, your contributions automatically increase as well. Aim to save about 15 percent of your income for retirement.
2. Create or Check Your Budget
If you don’t already have a budget, you should. A budget helps you track expenses and plan precisely what to do with your raise. Ask yourself detailed questions when re-setting your budget after a bump in income:
- Do I have an emergency fund?
- Do I have any debts that need to be paid off?
- Am I saving enough for my child’s college fund?
- Do I have any pressing financial needs, like replacing old tires?
Asking these questions will help ensure that your new income benefits you in the present and the future.
3. Maintain Current Spending
If you don’t have any urgent needs, maintain your current spending for a month or two. This cooling-off period will help you avoid making impulse purchases following your increase in income. In the meantime, the extra cash will build in your account. When the time comes to modify your budget permanently, you’ll have money available.
4. Account for Additional Costs
Once you’ve evaluated your budget and passed the cooling-off period, you can start to spend your extra income. Keep in mind, however, that many purchases lead to added expenses:
- Leasing a bigger apartment will likely mean a higher electricity bill and other fees.
- Buying a new bike might require a helmet, safety lights and a car mount.
- An ATV purchase means buying recreational vehicle insurance, as well as safety equipment and gasoline.
Many purchases come with secondary costs. Make sure to account for all those costs, or your boost in income could become a loss over time.
Make the Most of Your New Financial Windfall
Farm Bureau is here for you. We can help you make decisions with your newly added income. Contact your Farm Bureau agent today for budgeting and financial tools.