Congratulations! Your hard work has paid off. Finally, you got a pay raise.
You have plenty of time to celebrate your latest achievement. But there is one thing you need to decide right now. You need to decide how to manage your extra money.
It is easy to use the extra money for lifestyle inflation. But will that help to create financial security for you? Never.
Instead of wasting the extra money for frivolous expenses, why don’t you use this extra money to grow a beautiful financial house? This would help you live comfortably even during the golden years of your life.
Here are the 3 best ways to utilize your pay raise and build wealth gradually.
- Pay off your high-interest debt: Debts can damage you both emotionally and financially. Your credit score drops, you get debt collection calls, you pay higher-interest on new loans, you lose your mental peace, and so on. So, the first thing you need to do is pay off your high-interest debt with the extra money. This may be a payday loan or a credit card or an auto loan.
Although it’s more comfortable to pay smallest debt first, yet I would suggest you to repay high-interest debt since this costs you more money in the long run.
- Pay more towards your retirement plans: No one can guarantee your future. So, it is important to take steps for securing your financial future after retirement.
If your annual income is $50,000 and you get a 3% pay hike, then you’ll get extra $1500. This means an additional $125 every month before tax. If you contribute this amount to a traditional retirement account for 30 years with an average 6% interest, then your total savings would be $125,000. Your total retirement savings and Social Security benefits would be enough to spend your retirement days comfortably.
- Get yourself adequately covered: Health insurance policy, life insurance policy, disability insurance, etc. protect you when a disaster strikes. We don’t want to think that bad things can happen to us. But the reality is something different. A disaster can strike anytime.
No matter what Trump/Senate ultimately decides about the fate of the ObamaCare and HSA, you still need a health insurance policy to cover your medical bills.Based upon the latest developments, ObamaCare is likely to stay. Likewise, a life insurance policy is required to protect your family members when you’re no more. If you don’t have a life insurance, then buy one with the extra money.
- Strengthen your emergency fund: The best way to be ready for unexpected expenditures is to strengthen your emergency fund. Obviously, you can use your credit card for a car repair expense but this is an expensive option. High-interest will increase your credit card bill and eventually you have to pay more. Probably, this is why you should save 2-3 month’s worth of living expenses in your emergency fund. Since you have extra money now, use it to boost your emergency fund.
Last but not the least,
Don’t forget to save a little amount for fulfilling your dreams. Maybe you want to visit Egypt once in your lifetime or wish to start a business. Save a little every month. I’m sure you’ll achieve all your goals.
Did you get a pay hike recently? How did you use it? Have you thought about any other way to use the extra money wisely? Share with us.