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Tuesday, October 21, 2014

2 Things You Should Do When You Get a Raise

Tuesday, October 21, 2014 Posted by Chris Tung , No comments
Be careful how you treat yo' self
Everyone wants more money, but what did you do when you actually get more money? Rather than plan for the future, people often make huge changes in their monthly expenses after they get a raise. From leasing a new car to finding a bigger, more expensive home, people want to reward themselves after they get a raise which is perfectly reasonable; however, this behavior can lead to a never ending cycle of poverty because a raise rarely covers all of the new expenses. But, once they realize this, it's too late. They're now trapped in a situation where they'll need another raise to cover their new rent, their new car, and any other large expenses they've incurred because they wanted to treat themselves.

With annual reviews and increases in compensation packages right around the corner, here are two basic things you can do with a raise that will still allow you to enjoy it but will also set you up for a much better future:

1. Sign up for a 401k or increase your monthly contribution if you already have one

If you want to have a comfortable retirement, it's very important that you invest in the market, and there's no better way to do that then to take advantage of a tax-deferred retirement program like a 401k. If you haven't set up an account because you need every penny to go toward necessary expenses, your new raise can now be used to set up an account, and you can start taking advantage of this awesome benefit. A 401k account will allow you to invest a percentage of your paycheck to an investment account that will be used upon retirement. Plus, since it's a tax-differed account, you'll be able to take advantage of tax-differed growth, which means you won't have to pay yearly taxes on gains, dividends, or other distributions.

For those of you that already have an account, make sure to increase your contributions whenever you get a raise. Even a modest 1% increase in your contribution each year can make the difference between a decent retirement and a very comfortable retirement.

To learn more about 401ks, head over to the Bogleheads posts on 401k accounts. I've found them to be an invaluable resource when I was learning how to invest and wanted an unbiased analysis.

2. Move a percentage of your raise to a separate savings account each month

After you've set up a 401k account to take advantage of tax-differed investments, you should now move a percentage of your paychecks to a separate savings account to start growing an emergency fund. The reason this is such an important part to building a solid financial future is because it helps manage two issues: overspending today and poor planning for the future.

Once you move the money to a separate account that you cannot easily access with a debit card or ATM withdrawal, you'll likely forget the money is even there. Because you don't see the new money, you won't be so willing to go out and blow it all away on one big purchase.

Then, as you continue to make monthly contributions to this separate account, these small transactions will grow over time giving you a nice cushion for emergencies. Whether it's losing your job or getting hit by a bus and needing surgery, there's nothing more shocking than to have a huge financial emergency come up and not have any way to pay for it. Setting up a savings account now when you just got a raise will prevent huge financial problems if something terrible were to ever happen.

So I can't spend any of my raise?

When I tell friends to invest in their 401k and set up a savings account when they get a raise, they usually look at me blankly and ask me if I'm telling them not to spend any of their raise on things they need today or tomorrow. This is absolutely not true.

If you have debt or emergencies, you should definitely pay those off first, and you can still enjoy a percentage of your raise to give you more disposable income each week because you earned it. However, no one should use all of their raise to increase their monthly disposable income or else they'll be reducing their quality of life in the future. In the end, even small contributions to a 401k and separate savings account will significantly improve your future.

If you know of other things people should do when they get a raise, make sure to post in the comments!

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