Congratulations on your success at work! All those extra hours, meetings, and assignments have finally paid off-literally. Your new salary reflects your vigilant efforts.
When you receive your next paycheck, it would be easy to envision all the new purchases you’re going to make. Perhaps you finally have enough to make a down payment on that new Toyota Yaris. Maybe you’re pumped to purchase a complete collection of classic Marvel comics. Or possibly you’re ready to accent your wardrobe with the latest Prada handbags and shoes.
Before you celebrate your new income, now is the perfect time to reassess your finances. By planning what you want to do with your additional money in advance, you can anticipate potential financial problems before they occur.
Whether your raise is big or small, it will have an impact on your taxes this year. Your raise may even bump you up into the next tax bracket, so you’ll need to expect the effect your new income will have on your tax payments.
Be sure to withhold the proper amount from each of your paychecks to cover your new tax situation. If the raise came through your employer, you might want to contact your HR department about increasing the withholdings. It’s possible your employer may already adjust your paycheck directly through payroll, but it doesn’t hurt to check anyway.
Pay Off Debt
Once you’ve taken care of taxes, you’re free to spend your earnings however you want, right?
Unfortunately, student loans, credit card debt, and mortgage payments will quickly sap your new funds if you’re not careful. Aim to pay off the debt with the highest-interest rate first (the one that’s costing you the most money). Then move on to your next debt (and your next) until you’re completely debt free.
The less debt you have, the more funds you can free up for personal use.
Save, Save, Save
Once you’ve paid off your debts, it’s time to create a cash reserve. Set up an automatic contribution to your savings each month and aim to have at least three to six months of your net pay in this account.
Life has a way of throwing curve balls when you least expect it. Fender benders, basement flooding, and doctor’s visits will weigh heavily on your income, even if you have a higher salary. Having an emergency savings account will cover these unexpected costs.
Prepare for Retirement
When you’re in your early 20s and 30s, retirement can seem like a lifetime away. You may feel that you have more pressing matters to deal with, such as paying off student loans or creating an emergency account.
But some experts estimate that you’ll want to save up at least $1 million to retire comfortably, though that number varies depending on your spending habits and lifestyle. Unless you win the lottery, it’s unlikely you’ll reach this number overnight, or even in a few years.
Consequently, it’s important that you plan for retirement early. If you start saving at 25, you’ll have to put aside $4,682 per year to reach $1 million by age 65 (assuming you have 7 percent annual returns in your Roth IRA or 401 K fund). In contrast, if you wait until you’re 35, the amount you need to save doubles.
If you’re under 50, you can contribute up to $5,500 each year to your Roth IRA retirement funds. But you may be able to make more bang for your buck if you invest some of your earnings to create a balanced investment portfolio.
Select stocks, bonds, mutual funds, and exchange-traded funds to diversify your assets. If necessary, work with an investor to develop a consistent long-term growth of your investments. Your investor can then make adjustments to your portfolio based on changes in the economy and your financial goals.
Protect Yourself with Insurance
Once you’ve established your long-term financial goals, it’s time to protect you, your family, and your property with insurance. Part of being responsible with your money includes protecting your assets should anything happen to you, and multiple insurance policies can cover you during an emergency.
For example, if you recently purchased a home with your increased salary, you’ll want homeowners insurance to protect it. Illinois has unpredictable weather, but with the right policy, you can cover the cost of damage for weather repairs. And that’s not all! A good homeowner’s policy will also protect your home from theft, vandalism, and natural disaster.
Similarly, if you have a spouse and children, you’ll want life insurance coverage to help your family manage debts, medical bills, and funeral expenses. If you have elderly parents, life insurance can provide the money needed to hire in-home care.
Speak with your insurance provider to find out which policies would be right for your new income, your lifestyle, and any other needs you may have.