What to do with your pay raise (or any other financial windfall)
Asking for a raise has paid off for many U.S. workers in recent years, especially younger ones. Eighty percent of millennials who made the request ended up with a fatter paycheck, according to the 2018 Better Money Habits Millennial Report. A financial windfall—whether from a raise, gift, inheritance or side hustle—is always a good thing, but you want to make sure you manage the cash wisely. Here are some smart ways to handle a boost to your bank account.
Say hello to a new budget
If you got a pay raise, well done! But before you decide how to spend it, examine 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 create one, if you haven’t already). Once you have a solid plan for paying all your bills on time, explore ways to improve your financial situation with your new funds. If you’re a Bank of America client, you can use the Spending and Budgeting tool to stay on top of your money.
Kiss high-interest debt goodbye
More than one in six millennials stress about their credit card debt, according to the Better Money Habits report. Whenever you get a little extra money, it’s smart to make paying off high-interest debt a top priority. Getting rid of debt has a trickle-down effect on your finances. By eliminating high-interest charges and large minimum payments, you can free up more money for other financial goals. Less debt can also help improve your credit score, which means you may qualify for lower interest rates on mortgages and auto loans.
Prepare for emergencies
If you haven’t started yet, now is the perfect time to begin building an emergency fund. Ideally you should try to save at least six months of your basic living expenses, and you can use that money for things like car repairs, doctor visits or to pay your bills if you ever lose your job. That way, you can avoid borrowing money, adding to credit balances or tapping into savings meant for other financial goals. Learn more about using a Bank of America savings account for your emergency fund.
Tip: If you received a pay raise, you could adjust your direct deposit so a portion of your paycheck goes directly into savings or set up automatic transfers into your savings account.
Fund your future
Adding to a 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 that increase could make. You could also start investing some of the money for other medium- to long-term goals such as a down payment on a house.
Live a little
Once you feel like you have a good plan in place for the priorities listed above, you might consider other ways your additional funds can help improve your life. Think about how you might align your spending to your values and your goals. For example, you might spend a little more on take-out meals or a cleaning service to free up time you can spend with family and friends. Or you might put some money toward a goal that’s important to you such as joining a gym to improve your health, taking a class to advance your career or saving up for your dream vacation.
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