What You Should Do When Your Income Increases
It’s a nice feeling when you come into some money. Whether you received a raise or bonus, you started a side gig, or maybe you even hit the lottery, that extra money can go a long way.
Unfortunately, many believe an increase in income means an increase in spending, but there are many ways to use this money to make a difference in your financial future. So, before you go out and make a regretful purchase, here is what to consider doing when your income increases.
Now that your income has increased, you may be tempted to make those purchases you couldn’t afford before. Rather than spending it right away, or running up your credit cards, consider waiting a few months. This can help you realize how much extra money you will take home with your raise after taxes and deductions. Once you have a clear understanding of how much more money you have to work with, see if those dream purchases are now a reality.
Increase Savings and Retirement Contributions
As tempting as it is to go out and spend your hard-earned money on a large ticket item, consider increasing your contributions to your savings and retirement funds. This might not seem as exciting, but you will thank yourself when it comes time to retire. Even raising your contributions a small amount will help you better secure your financial future and increase your monthly income in your retirement years.
Build an Emergency Fund
You never know when you will be faced with an emergency or a large unexpected expense. Perhaps you are hit with a medical bill or you actually end up owing money during tax season. Your income increase can be used to help fund an account strictly for these types of emergencies. Make sure you define what constitutes an emergency and only dig into this fund if one arises.
Put the Money to Good Use
An increase in your take home money can help you in many ways. Consider putting the money to good use. This can mean using the money to save toward a down payment on a home, an improvement on your home, a car repair, or even a contribution to your child’s 529 college savings plan! There are many ways to put your money to good use, so it’s important to stop and think if this money is going towards a need or a want.
Make Changes to Your Budget
Now that you’ve considered what to do with your increase in income, it’s important to reassess your budget and make changes to specific categories. For example, if you plan on contributing an extra $200 to your retirement fund each month, make sure your new budget accounts for this increase. Since you now have more money to work with in your budget, this may be a good time to allocate money to areas in your budget that were tight before.
Pay Off High-Interest Debt
If your debt has been weighing you down, your new increase in income can help relieve some of this burden and stress associated with debt. Though paying off debt doesn’t sound as enticing as a large purchase, the less debt you have, the more room you can eventually have in your budget. We recommend tackling your debt with the highest interest first, which in many cases is credit cards. This can save you on the total interest paid and save you money in the long run. For longer-term loans like a mortgage or student loans, consider making adjustments to your repayment plan. Making continuous higher payments over a shorter amount of time will save you tons in interest charges.
If after you begin paying down debt you find you’re still struggling to make ends meet, consider contacting Tayne Law Group at 631-470-8204.
Don’t forget to have a little fun with your extra money. As long as you pay yourself first, there’s no reason you can’t treat yourself to something nice, as long as it’s not excessive. Like Warren Buffet says “do not save what is left after spending, but spend what is left after saving.” Just make sure you’re within your budget! Have you received an increase in income recently? How did you use the money? Feel free to share your comments below!