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So You Got a Pay Raise: Here’s What to Do With the Extra Money to Elevate Your Financial Future



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Congratulations on increasing your income! Now that your paycheck received a boost, you might be pondering the best approach to handle the additional money. Before the allure of impulsive spending takes over, it's crucial to devise a thoughtful strategy.

 

Neglecting to allocate this surplus income wisely could have long-lasting consequences for your financial well-being. The impact of inflation can erode the purchasing power of your money over time if not strategically managed. By forgoing investment opportunities, you risk missing out on the potential for your funds to grow exponentially.

 

Whether your goal is creating an emergency fund to cover unforeseen circumstances, securing your retirement, or building wealth for other endeavors, investing your raise is the key to unlocking financial stability and maximizing the potential of your hard-earned money.

In this guide, we will delve into a straightforward approach for managing your recent raise. By the end, you will not only gain a clearer understanding of where to allocate your funds but also be equipped with the knowledge to make prudent financial decisions.


Contribute Up to Your Employer’s Match

  • First things first, check if your boss is offering “free money” through an employer match. Contribute enough to snag that match – it's like getting a bonus on top of your paycheck!

  • Still chipping away at those pesky debts? I recommend that you contribute anyway. Don’t let this opportunity slip through your fingers.


Emergency Fund

  • If you have a spouse or partner and you're both working, three months of living expenses (it doesn't need to match your income) may be enough in case of an emergency.

  • If you're single or the sole income earner for your family, you may want to set aside six months of living expenses.

  • If you're a high-income earner or an entrepreneur, you may want to set aside as much as 18 months of living expenses to have some job mobility or take advantage of business opportunities.

Healthcare Savings

  • If you have a Health Savings Account (HSA), only available under a high-deductible healthcare plan (HDHP), you can make a pre-tax contribution of up to the current year’s maximum ($4,150 for an individual or $8,300 for a family in 2024).

  • If you can pay your health expenses from cash and leave your HSA to grow, you can use the funds tax-free in retirement for qualified healthcare expenses.

Retirement Savings

  • Once you've snagged that employer match, max out your retirement contributions. You can contribute up to the current year’s maximum to your employer’s 401(k), 403(b) or 457 plan ($23,000 in 2024).

  • You can contribute up to the current year’s maximum ($16,000 in 2024) if your business or employer has a SIMPLE 401(k) or SIMPLE IRA plan. If you set up a SEP IRA plan for your business, you can contribute up to maximum ($69,000 in 2024).

  • You can also see if you’re allowed to contribute up to current year’s maximum ($7,000 in 2024) to a Roth IRA for tax-free distributions in retirement.

  • Note: Eligibility is phased out for higher income earners, so make sure to double check first.

  • If you’ve made the maximum salary deferral contribution but want to contribute even more, consider if an after-tax mega backdoor Roth contribution is applicable.

Education Savings*

  • If you or your kids are planning to attend college or a trade school or to earn an advanced certificate you can invest in a 529 plan for tax-free earnings when distributions are used for a qualified educational expense.

  • You may be eligible for a state income tax deduction or credit if you contribute to a plan sponsored by your state.

I believe it’s more important to save for your retirement versus paying for your kids’ college if your funds are limited. Why? There are no loans or financial aid options available to fund your retirement. And your retirement (hopefully) has a longer time horizon than does funding your child’s college education.


Other Investment Savings

  • If you’ve maxed out what you can save in tax-deferred and tax-free accounts but can save even more, consider investing in a taxable brokerage account.

  • Are you charitably inclined? If so, consider utilizing a Donor Advised Fund. You can contribute stocks, cryptocurrency or cash and deduct from your taxes.

 

 

Now that we've unraveled the mystery of what to do with your extra cash, remember, this is about making your money work for you, not the other way around. Financial freedom is not just a catchphrase; it's a tangible goal. So, as you embark on this journey to maximize your recent raise, take pride in the fact that you're not just earning money – you're mastering it. 


Cheers to your financial prowess and the exciting possibilities ahead!

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