What To Do With a Raise?
Getting a raise is fantastic! It shows you are doing well at work, you are moving up in the corporate world, and your are on your way to a better possibility of financial security. However, if you aren't careful with how you utilize your raise, you can end up in serious debt. Here's what you should do with your next raise:
1. Start an Emergency Fund
If you don't have an emergency fund that can cover at least 3-6 months of expenses, putting those extra paycheck dollars towards creating an emergency fund should be your first priority. Why? When you do not have an emergency fund you put unexpected purchases on your credit card which creates an endless cycle of debt. Stop the cycle with an emergency fund.
2. Pay Off Consumer Debt
If you already have an emergency fund but have been struggling to pay off your credit cards, now is the perfect time to do so. Start with the smallest dollar amount first and work your way up to the largest dollar amount. Credit card debt is the most dangerous because of the exorbitant interest rates. Once you get into deep consumer debt sometimes you can't get out. Be smart with your raise and pay this off as soon as possible.
3. Contribute to Your Retirement
If you have an emergency fund and do not have any debt, start contributing or increasing your contributions to your retirement. This can be in the form of your company's 401k program or an IRA that you have started on your own. Many people do not contribute enough to their retirement and a raise is the perfect time do so without changing your lifestyle.
What not to do?
Do not increase your lifestyle! Many people receive a raise and then start buying more expensive items. This is the fastest way to getting yourself in insurmountable debt. Roughly 80% of Americans are in debt. So, unless you already have a fully funded emergency account, have no debt, and are contributing to your retirement, you simply cannot afford to increase your lifestyle.