I'm a Financial Planning Expert: The 3 Best Investments for Your Raise
If you recently received a raise from your employer, congratulations! A lot of hard work takes place behind the scenes as deserving employees go the extra mile and take initiative with their work responsibilities to earn their salary bump.
However, the amount of time and effort that goes into obtaining a raise doesn’t always translate to how the money is spent. Many people will receive a raise and immediately give into lifestyle creep, like buying a new car or going on a shopping spree. But the truly savvy aren’t spending this money. Rather, they’re saving it and viewing a raise as an opportunity to build wealth.
We spoke to Alex Duffy, an independent agent at Goldfinch Financial Group, to get his take on what’s worth investing in when you receive a raise. Here are the moves he urges you to take immediately.
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Build an Emergency Fund
The first step Duffy says you should make after receiving a raise? Slowing down.
Now is not the time to rush into an expensive purchase that is likely to depreciate. Instead, Duffy said to use this time to evaluate what you need, what you want and your goals for the short- and long-term. A good starting point is paying off any outstanding debt, like credit cards or student loans.
Once you’re debt-free, Duffy recommends generating an emergency fund if you don’t already have one. Make sure this fund can cover three to six months’ worth of expenses in the event of an unforeseen circumstance.
What if you already have an emergency fund? Check on it. If you recently pulled money to cover a surprise bill, your raise can be used to top off the funds or add a few more months’ worth of savings for a more substantial safety net.
Invest Money Into Tax-Advantaged Assets
Now that you’ve paid off your debt and built or topped off an emergency fund, it’s time to look into growth-oriented assets. Think 401(k), IRA, HSA and savings accounts. Ideally, Duffy says you should be saving money in one or more of these spaces.
“Some companies have automatic increases into 401(k)s. You can also increase the amount you automatically put into savings. Make savings automatic if you haven’t already,” he said.
Continue Saving Money
To recap, you put your raise towards becoming debt-free, creating an emergency fund and investing funds into tax-advantaged accounts. Now can you move into an expensive home or buy a new car?
Spoiler alert, but the answer is still a hard no. Duffy’s final recommendation is to continue saving money because these funds are going into one of the best investments of all: you and your future.
“Live on less than you make and you will have more money in all the different investment opportunities,” Duffy said. “If you can live on what you were making before the raise, your new savings potential can really make an impact on your future.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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