Got a Raise? This Is Your First Move to Make in the New Year
Don't blow the opportunity to make the most of your boosted paychecks.
Not everyone is fortunate enough to get an annual raise. But if you have a higher paycheck coming your way in the new year, it's important that you put that money to good use -- namely, by not spending it.
Of course, that's easier said than done. When your paycheck is suddenly more robust, the temptation to spend can increase. But that could, in turn, stop you from meeting your financial goals. That's why there's one important move you must make right away if you're getting a raise -- set up an automatic transfer to your savings account.
A seamless approach to saving money
With an automatic transfer, you arrange for a portion of each paycheck to go directly from your checking account to your savings account. That way, you avoid the temptation to spend that money, and instead ensure that it's socked away for more important things.
At minimum, aim to save the exact increase your raise amounts to. If your raise increases each paycheck by $47, set that $47 to transfer automatically.
Remember, any extra in your paychecks is money you weren't already relying on. Therefore you should have no problem parting with it. But if you don't set up an automatic transfer and you do get used to having that money to spend, saving it becomes much more difficult.
Of course, if you already have a solid emergency fund and don't need additional near-term savings, there's another automatic transfer option. Put that money into a retirement account. You have a couple of choices. You can find an IRA that offers an automatic savings feature and send your extra money there. Or, you can increase your contribution to your employer's 401(k) plan by the amount your paycheck goes up. With a 401(k), your contributions are deducted automatically by your payroll department from your earnings.
If you put money into a traditional IRA or 401(k) plan (not the Roth version of either of these accounts), you also lower your tax bill. That doesn't happen with an automatic transfer to a regular savings account, but if you don't have a full emergency fund, that should take priority over long-term savings -- even if it means paying the IRS a little extra.
Saving money is easier when you don't have to think about it, so automating the process is a good way to stay on track financially. Even if the raise you're getting is modest, it pays to make the most of it -- by saving it, rather than blowing it. Of course, if you're going to bank your raise and you can afford to do so, there's nothing wrong with sending more money than your pay boost to savings. For example, rather than just transfer your $47 increase, consider $75, if you can swing it. The more you save off the bat, the more financial security you'll buy yourself.
The post appeared first on The Motley Fool.