While pay freezes have been the norm over the last few years, raises are slowly making a comeback in the workplace. Getting a raise can be a great confidence booster and it can significantly improve your financial situation. But only if you use it wisely. If you’ve recently gotten a raise or you expect a bump in pay in the near future, here are a few smart ways to put those extra dollars to use.
Dump Your High Interest Debt
If you’re carrying around a mountain of debt, not only are you throwing money away on interest but you’re also making it harder to achieve your financial goals. When you’re already on a tight budget, it makes it more difficult to save or plan for retirement when you’re shelling out big bucks to debtors.
Whether you get a sizable raise or just a small increase, using that extra cash to pay down your debt can save you hundreds or even thousands of dollars in interest. Every penny counts and the faster you can get rid of the debt, the closer you’ll be to financial freedom.
Fatten Up Your Emergency Fund
One thing financial experts tend to agree on is the necessity of an emergency fund. Having a stash of cash set aside means you can cover unexpected expenses without having to charge it to a credit card or take out a loan.
How much you save in an emergency fund is really up to you. You may be comfortable with as little as $1,000 or you may prefer to save up to a year’s worth of expenses. If you don’t have anything in savings or your emergency fund isn’t where you want it to be, getting a raise gives you the perfect opportunity to start building it up.
Sock It Away for Retirement
Once all your high-interest debts are paid off and your emergency fund is at a comfortable level, you might consider using the added income to pad your retirement accounts. Start with your employer’s retirement plan if you’re not already maxing out your contributions. Putting your extra pay into the plan is an easy way to increase your nest egg and get the most of out of the company match.
If you’re already maxing out your employer’s plan or you’re not covered by a retirement plan at work, you could use a pay raise to fund an individual retirement account. Contributions to a traditional IRA are tax-deductible but you’ll have to pay taxes on the money once you start making withdrawals. If you go with a Roth IRA, you won’t pay any taxes on your qualified withdrawals but you don’t get the benefit of the deduction for contributions.
Bulk Up the College Funds
The cost of a college education is at an all-time high and student loan debt has reached critical levels. If you’re worried about your kids being saddled with student loan debt after they graduate, a pay raise might allow you to kick in a little extra to their college funds.
One of the most popular college savings options is the 529 plan, which offers some tax advantages for parents. These plans have high contribution limits and you can even open one for yourself or your spouse if you’re planning to go back to school. Just be sure to pay attention to the fee structure and the types of investments that are available when you’re comparing 529 plans.
Pay Down Your Mortgage
Putting a raise towards your mortgage principal makes sense if you’ve got no other debt and your loan carries a high interest rate. If you’ve already got a low rate, you can use a raise to tackle those home improvement projects you’ve been putting off. It’s a good way to potentially increase your home’s value and paying cash means you won’t have to tap into your home’s equity.
Invest In Yourself
Putting your extra cash towards your debt, retirement or into your home are all smart moves but one of the best things to invest in is yourself. If you’re feeling stalled in your career, you might use your pay raise to take a class or cover membership dues for a professional organization. If it’s personal growth you’re interested in, you could put the extra cash towards a weekend retreat or a few days at a creative workshop.
Whatever you decide to do with a pay raise, the key to making the most of it is to have a plan for the money. Otherwise, you’ll just end up wondering where all the extra cash went.
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