How to Invest that 2.9% Raise You’re Getting Next Year

Hard work really does pay off. You’ve worked like a madman (or madwoman) for the past six months, putting in extra hours off the clock, and making sure all your projects are done ahead of time. And it’s being noticed by the powers that be.

You’re really excited about the direction in which your career is moving. That 3% raise (the new normal) is just around the corner — when the next financial year starts, you know it’s yours. But how can you invest it wisely?

A three percent increase may not seem like that much extra money. For those who earn less than $50,000 a year, it’s less than a few thousand dollars. It would be really easy to blow it and think to yourself later “What happened to my raise?” While it may not be a giant sum of money, investing it in the right places could easily change that. Here are some tips to help you decide how to make the most of it.

Increase Your 401(k) Contribution

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This is possibly the easiest (and one of the wisest) of ways to go about investing a pay raise. Simply increase your contribution percentage to reflect the percentage of the raise. For example, if you were previously contributing 3 percent, raise that amount to 6 percent or more, depending on your financial standing.

It’s definitely an exercise in delayed gratification — you won’t be using your raise to go on a vacation or to buy new furniture for your home. You won’t be able to experience it tangibly right now, but the added contribution to your retirement will drastically improve your standard of living down the road. If your company matches any portion of your contribution, the benefits of this plan of action will skyrocket. Check out this calculator if you’re looking for a way to help you visualize how your money will grow. Your retirement nest egg will undoubtedly be a cozy one, and you’ll be glad you made the decision to invest your money this way.

Master this principle, and you’ll be well on your way to developing some real financial expertise. With a little luck, you’ll be browsing job openings at FI in no time at all.

Plan for Your Children’s Future

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If your retirement plan is already pretty set, and you’re comfortable with its projection, think about the future of your kids. Have you started saving for their college education yet? How about their first car(s)?

There are a few routes you could go with this concept. If your plan is to save for higher education, look into education savings accounts. These accounts yield tax-free disbursements for enrollment at eligible institutions, and will come in very handy when the time comes.

Set up your contribution plan to automatically transfer a set amount into this valuable savings plan, get back to work, and forget about it until your kids start to graduate from high school.

Pay off Debts Faster

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Okay, so you don’t have any kids. Or perhaps you do, but their college tuition is paid for through other avenues, and your personal retirement fund is already on the right track. Now’s a great time to increase credit card and loan payments. Pay off your smaller balances first, and look into consolidating debts to simplify the process and potentially reduce interest rates.

Then set up or adjust your automatic payment plan to reflect your boosted income. Once these debts are paid off, you can redirect those funds toward something more enjoyable.

Tuck it Away

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The cost of living is constantly inching higher and higher. Another viable option for your added income is to take it and tuck it away. Don’t put a label on it or designate it for any specific purpose. There will come a day when you will need it, and you will be happy to have a financial cushion.

This way, if the financial success you’re experiencing now doesn’t last, you’ll have a nice safety net that you can fall back on and avoid disaster.

Don’t let your 3 percent raise blend into the rest of your monthly expenses. That last thing you want is to look back on it a year or two from now and wonder where it went. Make a plan for yourself and put it to good use. That being said, everyone has a different plan set for their lives, and there’s no cookie-cutter right or wrong answer. Only you can determine which option will fit your life plan and further your personal and financial goals.

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