The last time you got a raise or a year end bonus, what did you do with it? I can tell you what I did with mine. During the earlier years of my career, I would absorb any pay raises or bonuses into my spending and let lifestyle inflation creep up.
I wanted a new wardrobe?
Take my bonus and splurge on a resort vacation?
The choices I made with pay increases unfortunately fueled my former shopaholic tendencies and I was really no better off after the raises than before. It took me awhile to figure out that I should put the additional earnings to good use and make my money work for me.
If you recently received a raise, are currently negotiating for one or will receive a year end performance bonus, here are three options on how to allocate it so that you can continually reap the rewards of your hard work.
1. Kick Debt To The Curb
Whether you are having it out with student loans, credit cards or anything else that eats up your paycheck unnecessarily, using the additional income to pay debt down is always a smart choice. The longer you carry your debt load, the more interest you’ll pay and debt is a big cause of stress. Working mainly to service debt is a truly frustrating experience so the sooner you can get that over with, the better.
2. Save For A Rainy Day
If you’ve ever heard of Murphy’s law then you’ll know what I’m talking about. If anything can go wrong, it will. Establishing an emergency fund to deal with life’s unpleasant surprises is a valuable tool when it comes to your personal finances. You will easily remember to budget to pay your cellphone bill or rent each month. It’s harder to come up with $1K when the car breaks down or you accidentally crack a tooth. Use your raise or bonus to start or top up an emergency fund in order to weather unexpected moments.
3. Pay Less Taxes
Take advantage if your company offers a retirement savings plan, especially one that offers a matching amount. By investing your raise or bonus, you’ll get immediate tax relief from Uncle Sam. Your money remains tax sheltered until withdrawal and will grow thanks to the wonder that is compound interest. Even if your company doesn’t offer a retirement plan, you can still accomplish the same result by opening an individual IRA.
You can decide to split your additional funds on a combination of the above or just apply laser focus on one option until you’re done. Then rinse, lather and repeat for the next goal. If your financial situation is positive, consider donating part of the raise or bonus to your favorite charity or social organization.
I also believe in treating yourself kindly, so reserve a portion of the additional earnings in order to celebrate your success – you earned it.
How did you spend or save your bonus or money from a raise?