Whether you’ve earned a promotion at work, received a merit increase or have been given a cost-of-living increase, a bigger paycheck is always welcome. However, that extra money can quickly disappear if you aren’t careful. Considering switching banks to find the best rates and setting up a savings account is a great place to start planning your overall budget. Here are some tips for revising your budget and making your raise work for you.
If your raise is a few percent, consider bumping up your 401(k) contributions. This is especially vital if you aren’t contributing enough to get the full match offered by your employer, if one is offered. Adding an extra percentage point or two now can mean an enormous gain once you are ready to retire.
Open a Roth IRA
For those who are already fully contributing to a 401(k) or are not offered one at work, a Roth IRA is another way to funnel some of your raise into retirement savings. Roth IRAs are set up through an investment brokerage, bank or other financial institution. You then contribute post-tax money into it and usually pay nothing when you make a withdrawal. Look over your options and consider setting up an automatic transfer into your IRA every month. It adds up quickly and can help you pad your retirement funds.
Plump Up Your Emergency Fund
If you have less than six months’ worth of expenses in your emergency fund, use some of your raise to supplement it. In today’s tough financial climate, you may even want to have a year’s worth of expenses in the bank. If you have children or work in a highly specialized field where jobs are scarce, consider putting away a bit extra.
Invest in Yourself
If you have wanted to take college courses or learn more skills to help your career but money woes have been holding you back, consider using part of your raise to save for what you want. Whether it’s a degree, a certification or just a workshop, you will always reap the rewards of continued education and expertise.
Have a Plan
Once you have an idea of how you would like to use your raise, sit down with your budget and make all the necessary corrections. Set up automatic funds transfers if you like to use online banking, and run all of the numbers twice to ensure your figures are correct. Don’t forget to leave a portion of your raise for discretionary, fun spending. You’ve earned it!
Getting a raise at work can allow you to make huge strides in saving and investing in yourself. If you aren’t sure where to start or need guidance, set up an appointment with a fee-only financial planner or a trusted friend to help you get it sorted.
Tom Drake writes for Financial Highway and MapleMoney. Whenever he’s not working on his online endeavors, he’s either doing his “real job” as a financial analyst or spending time with his two boys.