More money is always something to celebrate. Here's how to make the most of it.
Getting more money in your paycheck is always a good thing, so if you're looking at a raise going into 2020, consider yourself lucky. But before you make plans to spend that extra cash on fun but technically unnecessary things like vacations, gadgets, and entertainment, think about some of the ways that additional money can change your financial picture for the better. Here, in fact, are a few things you should strongly consider doing once you're the proud recipient of a salary boost.
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1. Finish building your emergency fund
If you don't have at least three months of essential living expenses tucked away in a savings account, then every extra dime needs to go towards your emergency fund. If you don't build some cash reserves, you may be stuck in a situation where you're forced to rack up debt when a large unplanned bill lands in your lap, or when you're unable to work and earn money for a period of time. For even better protection, aim to have six months of living expenses in savings. That's a particularly smart idea if you're a homeowner or own a vehicle, in which case you can't discount the possibility of costly -- and sudden -- repairs.
2. Pay down some debt
Whether you owe money on credit cards or are still in the process of paying off your student loans, use that extra cash in your paycheck to knock out some debt. If you have credit card and student loan debt, you should generally focus on the former first, since it's bad for your credit score and tends to come with higher interest. The sooner you shed either type of debt, the less interest you'll pay on it.
3. Start saving for retirement
It's never too soon to start building a nest egg, even if you're fairly new to the workforce. In fact, the sooner you start, the more time you'll have to invest and the larger your larger retirement fund will be. In 2020, you get the option to contribute up to $6,000 to an IRA if you're under 50, or up to $7,000 if you're 50 or older. If you have access to a 401(k) plan through work, the contribution limits are even higher -- $19,500 and $26,000, respectively.
4. Purchase life insurance
You might think you don't need life insurance, or that those costly premiums aren't worth the money. But here's the thing -- if you have people in your life who depend on you financially, whether it's your spouse, your children, or even your parents, then you need life insurance to ensure that they're protected in the event of your untimely passing. The good news? You don't have to spend a fortune on premiums. Consider opting for term life coverage over permanent life insurance to make premiums less expensive. Bear in mind that your policy will run out after a certain period of time, and it won't accumulate a cash value you can access or borrow against. If you apply when you're fairly young, you're more likely to snag a competitive rate.
5. Invest in your home or automobile
We started by talking about the importance of having an extra-robust emergency fund if you own a car or vehicle. If you're sitting on extra money in your paycheck, you should consider spending some of it to better maintain those items, or address low-key fixes that could turn into larger, costlier issues down the line. For example, if you've been putting off a $400 maintenance item on your vehicle due to a lack of funds, and now have $100 more available in your monthly paychecks, you can allocate four months' worth of extra cash to that mechanic appointment. The same holds true for any home maintenance item that could use your attention sooner rather than later.
Tempting as it may be to use your extra earnings to splurge on fun things, you're better off being responsible with that cash. Or, come up with a reasonable compromise -- use most of your extra earnings to improve your financial outlook, but spend a small portion on things that offer instant gratification. For example, if you've snagged an extra $100 a month, put $80 toward emergency savings or paying off debt, and spend $20 on an extra restaurant meal or series of smaller treats, like fancy coffees. After all, you work hard for your money, and it's natural to want to reserve a portion of your raise for things that make you happy.
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