According to recent economic figures from the Commerce Department, wages and salaries grew by 0.4% in January, after growing 0.4% in December. Personal income increased as well. In an economy where there has been a lot of concern about income and wages and stagnation, even a small indication of an increase can be encouraging.
Additionally, the Congress has extended the popular payroll tax cut through this year, so you don’t have to worry about a shrinking paycheck — at least from the end of a tax break. If you are seeing a wage increase — an increase in income — what will you do with it? A bigger paycheck can mean bigger things, but it can also mean bigger problems.
Improving Your Situation
Many people assume that once they have more money, things will be better. Indeed, many people think that an increase in income will fix most problems in life. However, just having more money won’t change things. You need to have a plan for that money.
Before you spend your wage increase on frivolities, figure out what you want your money to accomplish. Do you want to pay down debt or save for retirement? Your wage increase can go a long way toward improving your financial situation, whether you want to shore up your future or better your current situation.
Even if you want to use your improved income to buy new furniture, or to save up for a vacation, the point is to have a plan for your money. Whenever you have a change in circumstance, it’s important to consider what you can do with your new financial situation. If you don’t create a plan for your money, chances are that it will just leak away, serving no purpose that helps you.
Ideas for an Increase In Income
Before you begin spending up to your new level of income, it’s a good idea to use the money for something else. Many people find themselves experiencing lifestyle inflation as a result of a wage increase. They spend to the new income, buying cars and houses, or increasing monthly bills. Before increasing your monthly obligations, consider some other ideas for your money:
- Build your emergency fund: You can reach your goal of a solid emergency fund with the help of your increased income. Use the money to build up at least six months’ worth of expenses so that you can draw on it in difficult times.
- Boost your retirement savings: If you haven’t maxed out your retirement contributions yet, your extra income can go toward that goal. Instead of spending the extra money on upgraded satellite service, put it toward your future by saving for retirement, and let the power of compound interest work in your favor.
- Pay off debt: One of the best uses of your extra income is to pay down debt. Debt sucks your wealth, and paying it off faster can help you out quite a bit. Before you build up your vacation fund, try to pay off the high interest debt. It’s one of the best uses of an increase income.
No, there isn’t anything wrong with setting aside some of the money for something extra and fun. However, be careful that you aren’t just continuing to spend up to your income. You want to prepare for what’s next as well.
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.