Believe it or not, people in America are still getting pay raises and earning promotions. Despite unemployment continuing to be high, there are still people earning a pay raise. For example, the United States military will receive a 1.9% pay raise in January. So, the real question becomes, what should you do with your pay raise?
Things You Should Do With A Pay Raise
Pay Off Some Of Your Debts
One of the best things that you can do with a new pay raise is to pay off your existing debt, especially credit card debt. Paying off high interest credit cards is exactly like earning that interest rate on a similar investment or savings account. So, for example, if you pay off a credit card with your new pay raise that was charging you 16% annual interest rates, that is equivalent to earning a 16% rate of return on in investment with that same amount of money. This makes it easy to compare the opportunity cost of using your new pay raise. Which course of action would be the most profitable to you based on current interest rates on your debt and rates of return on investments?
Max Out Your Roth IRA Contributions
Far too many investors choose to reduce their Roth IRA contributions when times get tough. Time is the most important factor that young investors have going for them. You will never be able to get these years back that you have not been investing in the stock market. Now is the time to slowly work your way back into maximizing your Roth IRA contributions. Using your new pay raise is an excellent task for that new money.
Build Up Your Emergency Fund
Almost every financial planner on the planet shouts from the rooftops that we should all have at least three to six months of living expenses saved in an emergency fund. But, far too many people have not be able to reach that mark. Now is the time to pump up your emergency fund with your new pay raise. You should consider doing it now while you are still living off your old salary and won’t miss the new money as it is deposited atomically into the savings account or money market fund where you keep your emergency fund stashed.
Have you gotten a pay raise lately? What are you doing with that new found money?