Make Your Raise Work for Your Future
When you get a raise, it’s natural to immediately think of ways to spend it. And while dining out more, taking a big vacation or buying the latest smartphone may be top of mind, that extra cash is also a great opportunity to strengthen your financial health. The key is being intentional about where that extra money goes before it quietly disappears into everyday spending — or an impulse splurge.
Start With a Fresh Look at Your Budget
When your income increases, it’s a good idea to revisit your budget and see what’s changed. You might discover you have even more breathing room than you thought. Many financial advisors advocate following the 50/20/30 rule for budgeting: 50% of your after-tax income to needs and obligations, 30% to wants and 20% to savings and paying down debt, though a rule of thumb like this may not be the best fit for your individual situation.
About two-thirds of Americans say they’re saving less than 10% of their income, and half of those aren’t saving anything. But here’s the thing about budgets: They’re living documents. As your salary grows, the actual dollar amounts in each category can increase, even if the percentages stay the same. More dollars mean more flexibility — and more opportunity to shore up your financial foundation.
Watch Out for Lifestyle Creep
When you have more money in your pocket, it’s tempting to start spending more on wants instead of needs. Discretionary purchases can add up quickly, making long-term financial progress more challenging.
To keep extra earnings working for you, direct a meaningful portion toward paying your future self first, then think about treating yourself a little with what’s left.
Rebalance Your Financial Priorities
Depending on the size of the raise, it may give you the latitude to stop treading water and start making progress on long-term goals. This is especially important for retirement savings — that 20% portion of the 50/30/20 rule includes contributions toward retirement. If that feels out of reach right now, don’t let it keep you from starting. Even a 1% bump in your employer-sponsored retirement plan contributions can make a big difference for your future quality of life. And if matching dollars are available in your 401(k) and you’re not earning the maximum match, try to increase your contributions to get those free dollars.
Make It Automatic
One of the easiest ways to ensure your savings grow with your career is to automate them. If your employer offers it, set up your 401(k) contributions to increase automatically. That way, you won’t even have to think about it — and your savings rate can rise alongside your income. Over time, those small, automatic increases can really make a difference in how prepared you feel for the future. And when you sock that money away before you see it in your bank account, it can feel a lot easier to save.
Tailor the Plan to Your Life
Generalized financial rules can be helpful, but you should fit them into your unique circumstances. If you’re living rent-free with family or in an area with a low cost of living, you might have the flexibility to accelerate debt payoff or boost your retirement savings. On the other hand, if you’re supporting family members or faced with high housing costs, adjust those percentages to fit your reality.
Make an appointment with a Financial Professional to review and adjust your plans at least annually and any time there’s a major change in your circumstances. Your raise reflects your hard work and increased value to your employer — so make sure your future self reaps all the rewards you’re due.
Sources
https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp
https://finance.yahoo.com/news/much-americans-putting-toward-savings-120014470.html