All of your hard work hasn’t gone unnoticed. You just got a pay raise! After the initial excitement, you may find yourself wondering how to get the most out of the extra cash. Having extra cash can lead you to develop some bad financial habits. So, be sure to do something productive with your money. Below are some ideas to get your pay raise to work for you.
Take the extra money you get each paycheck and use it to make payments on your high interest debt, such as credit card and student loans. Paying off debt can improve your credit score - always a bonus. While this may not sound as fun as a shopping spree, the rewards will stay with you the rest of your life.
Since money taken out for your retirement plan is taken out before taxes, it won’t shrink your bank account as much as you may think. For example, if you're in the 25 percent tax bracket, get paid $5,000 per month and contribute $500 to your 401k, your paycheck will shrink by only $375, not the full $500.
If you invest the maximum amount possible into an IRA every year (which equals $5,500 in 2016), you’ll have a nice nest egg to withdraw when you retire.
Charitable donations not only help your community, but they can have added benefits to your new tax rates. Any donations made to tax-exempt organizations are tax deductible. As one option, you can set set aside a percentage of your income for donations. This makes it easier to claim on your taxes, and easier to adjust in the event of an income fluctuation. Some don’t feel comfortable donating money. In this instance, consider donating goods instead.
By setting aside a small part of your check, you can easily finance a lavish vacation in just a few years. Putting $300 a month into a savings account for two years can add up quickly. This will allow you to pay for everything in cash and not be left with a debilitating credit card bill when you return from paradise.
All of these don’t mean that you can’t go out for dinner to celebrate after a raise, but you should think about the larger perspective of your pay increase. Would you rather have one really great dinner or a solid financial future?