Revisiting your finances after a raise, promotion or windfall
Five tips on what to do with a pay raise or other influx of cash.
A financial windfall—whether it’s a raise, promotion, inheritance or simply selling an old set of coins on eBay—can be great. Using that extra cash wisely requires some planning, however. Here are some smart ways to handle the boost to your bank account.
Say hello to a new budget
If you got a pay raise, check your paycheck to see how much you actually take home each month, since taxes might be more than you expect. Then reassess your budget (or learn why it’s important to start one, if you haven’t already) and explore ways to improve your financial situation, using your new funds to meet your long-term goals.
Kiss high-interest debt goodbye
The average U.S. household owes $5,700 in credit card debt, according to the most recent data from the Federal Reserve.1 Paying off debt should rank near the top of your priority list. By eliminating interest payments on those accounts, you can put that money to more positive uses such as investments and home repairs.
Getting rid of debt has a trickle-down effect on your finances, too. Less debt can help improve your credit score, which means you may qualify for lower interest rates on mortgages and auto loans. That also frees up cash for other goals.
“By eliminating interest payments on those accounts, you can put that money to more positive uses such as investments and home repairs.”
In case of emergency …
If you haven’t started yet, the perfect time to begin building an emergency fund is now. Ideally you should try to save at least six months of your basic living expenses. If you lose your job, you have a stash to pay your bills until you find a new position. You can also draw on this money if you are faced with an unexpected expense such as a car repair, home repair or medical bill.
Give yourself a better retirement
Placing more money in your retirement account is one of the best ways to put new income to use, especially if your employer matches your contributions. Consider increasing your contributions by the same percentage as your raise.
Use the Merrill Edge Personal Retirement Calculator to see how much difference your increased investment could make.
Live a little
As important as your long-term financial security is, you shouldn’t feel that all of your new money has to go toward investing for the future. If you live on an extremely tight budget, creating a bit more wiggle room can improve your day-to-day life. A 2014 survey by the American Psychological Association found that 72 percent of adults are stressed about money at least some of the time. A raise can help lessen some of that stress and allow you to spend more on groceries, clothes or eating out.
- Federal Reserve Survey of Consumer Finances, 2013
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