Despite uneasy feelings about the economy, many working people are enjoying higher salaries. Nearly two-thirds (64%) are reported to getting a pay increase at some point in the past 12 months, according to a new survey. Being proactive with a pay raise is key to financial success. Instead of letting the extra cash slip through your fingers, devise a plan and allocate at least a portion of the money toward your biggest financial priorities, such as paying off debt or saving for retirement.
If you’re feeling stuck, a financial advisor can offer personalized guidance and help you make informed decisions that align with your goals.
Be proactive with your pay raise
Receiving a pay raise at work is cause for celebration, but a higher salary is also an excellent opportunity to start tackling financial priorities. Instead of falling prey to lifestyle creep, workers can put extra money from their pay raise toward long-term financial goals, like paying off debt or building up an emergency fund. Getting in the habit of paying yourself first — no matter how much money it is — is one of the best financial habits you can build.
After all, time in the market and compound interest pay the biggest dividends for your finances.
Pay down debt
While strengthening savings and investments is important, redirecting a new pay raise toward debt repayment can help build a stronger financial foundation. Prioritizing high-interest debts, especially credit card debt, can reduce how much you pay in interest over time and improve your credit score. With interest rates at their highest point in over 15 years, it’s more expensive than ever to carry a credit card balance. Yet 47% of credit cardholders are carrying debt from month to month. Paying off debt often draws money away from other financial goals, such as investing.
For many of us expecting our finances to stay the same or get worse in 2024, 19% say debt is holding them back. Eliminating debt is always a popular New Year’s resolution, and 2024 is no different.
Boost your emergency savings
An emergency fund is a financial safety net that allows you to weather job loss, medical emergencies, and other unexpected events without jeopardizing long-term goals or racking up high-interest debt. Financial experts recommend saving at least three to six months' worth of living expenses to build a strong financial buffer. Inflation and high housing costs challenge saving efforts, leaving less discretionary income to build an emergency fund. More than half (57%) who haven’t boosted their emergency savings or have no savings at all say inflation is keeping them from saving more, while 38% cite having too many expenses as the reason why they haven’t increased their savings. High inflation feels a bit like taking a pay cut, and it might be one reason why the economy isn’t as strong as it looks on paper.
Receiving a pay raise at work can be an excellent way to elevate your savings.
Increase your retirement savings
Time is a valuable ally in growing your investments, so the sooner you start saving for retirement, the better. By starting early, your money has more time to generate returns, and over time, these returns earn their returns. This compounding effect can significantly amplify the value of your retirement savings over time. But saving for the future isn’t always a top priority for many people: Nearly 1 in 4 workers (22%) say they haven’t contributed to their retirement in at least a year, according to a survey. Meanwhile, 56% of workers feel behind on saving for retirement. Understanding just how much to save for retirement can also be a challenge.
Many experts recommend saving 10 times your annual salary to fund your retirement and live comfortably.
Work toward your financial goals
Many people often juggle multiple financial goals at once, from saving for a down payment on a home to building an emergency fund. A pay raise can help make it easier to tackle multiple goals at once, but learning how to prioritize them isn’t always easy. When your income changes, it’s smart to update your budget and take a hard look at where your money is going. About 13% cited budgeting their spending better as their main financial goal for 2024. Homeownership is another major goal for many people. 74% cited owning a home as part of the dream, according to a Financial Security survey. But making that dream a reality is increasingly difficult as housing costs rise amid higher interest rates. Nearly half (46%) of aspiring homeowners say that not having enough income is holding them back from buying a home.
Money Tip: Use a savings account to put away money from your pay raise and earn interest as you save for your specific goals.
Do you need a financial advisor?
Working with a financial advisor can be a smart move after receiving a pay raise. Financial advisors provide personalized guidance on managing money, investments and achieving financial goals. They can assess your unique situation, offer advice and investment strategies, and help you plan for major life events like retirement or a child’s education expenses.
Whether you should work with a financial advisor depends on your financial knowledge, goals and the complexity of your situation. If you’re confident about managing your own money, you may not need one. But if you’re uncertain about how to prioritize different goals or you need help constructing a tailored financial plan, a qualified advisor can provide the help you need.
If you’re not quite ready to work with a financial advisor, there are plenty of other ways to boost your financial knowledge.
If you decide to work with a financial advisor, make sure to look for a fee-only fiduciary with credentials and experience. With the right professional by your side, you can create a custom plan that prioritizes your goals and makes the most out of your new pay raise.
Adapted from: Columbian
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