So your employer has finally rewarded you for all that hard work. Now what? When you receive a raise at work, it can be tempting to set out for a shopping spree, but it’s wise to wait a few weeks before using any of this new cash. It’s important to see how much more your raise really brings you each paycheck and plan to use this larger amount to reach your financial goals. Check out the following ways to put your raise to work.
1. Pay Off Debt
If you have debt hanging over you, it’s a good idea to make your highest priority whittling it down or getting rid of it completely. Create and execute a debt repayment plan, focusing on those with the highest interest rates, usually personal loans or credit cards. Without debt, you will be able to save more money and reduce stress. Not to mention that keeping your revolving debt, like credit cards, low (or paying it off entirely) can help improve your credit score. (You can see how your debt is affecting your credit scores by checking them for free on Credit.com.)
2. Adjust Retirement Plans
After reviewing your debt and liabilities, it’s important to check in on your progress with retirement savings. You can use the extra money each month to start maxing out your retirement benefits, first focusing on your 401(k), particularly if your employer offers matching contributions.
3. Make Extra Payments
Whether it is student loans, car or mortgage payments, one or two extra payments can go a long way in helping you become debt-free. This can shave years off of your payments and save you more interest in the long run. You can add a full extra payment each month or even just some extra money each time you make a payment. Before you do this, however, it’s important to make sure you won’t be penalized for pre-paying (especially when it comes to your mortgage).
4. Pad Your Emergency ‘Cushion’
It’s a good idea to use some of your raise to create or enhance your emergency fund. This will help you out in case you lose your job or something else unexpected and expensive comes up. It’s often recommended that you keep at least six months’ worth of income aside so you will be prepared for whatever comes your way.
5. Reassess the Budget
Before you start allocating money for new budget categories or decide to add more money to underfunded ones, it’s important to review your income and expenses carefully. Think about where your raise could do the most good and continue to keep track of your net pay and costs each month.
6. Consider Taxes
While you are planning and executing what to do with your raise, be sure you do not forget to account for taxes. The more you make, the more you are taxed so it’s a good idea to investigate any change this raise will make during tax season. Also, consider increasing your charitable donations — it gives you a great feeling to give back and can reduce your tax burden since donations to tax-exempt organizations are deductible.
7. Do Something for You
Being financially responsible doesn’t mean you shouldn’t treat yourself after you worked so hard to earn this cash. Consider what reward you can afford and allow yourself to celebrate your success — in moderation.
However you use your raise, now that you have worked for the money, make this money work for you. Nothing is a better reward than a more secure financial future.
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