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The following is a guest post written by Chloe Flowers, a personal finance writer.
Getting a raise is great news. Not only does it signify an achievement, but it will also allow for a bit more financial flexibility. That means a little more wiggle room when it comes to your bills, a few more opportunities to treat yourself without feeling guilty, and most importantly, more money to save for your future. But unfortunately, sometimes increased income leads to common saving mistakes.
Common Saving Mistakes Lead to Financial Insecurity
It’s crucial to remember that along with getting a pay rise, you should also be increasing the amount you save for retirement as well. After all, this is an opportunity for you to do more with what you have. However, this may prove difficult, as many of us inadvertently make money mistakes that often disrupt our efforts to save and achieve our financial goals.
In fact, worrying reports have revealed that approximately 58% of Americans don’t even have $1,000 in savings to cover emergencies. The financial situation of most Americans is worrying, to say the least.
Following on from this, 40% of respondents in a Marcus financial stress survey say that their finances keep them up at night, what with the amount of debt the majority of Americans are saddled with. That said, we want to encourage you to stay ahead and be smart with your financial decisions — especially with your recent boost in income.
Treat your raise as a new opportunity to take larger strides in your journey towards financial independence. And if you’re ready to make sure your financial decisions lead to success, take note of these pitfalls that you should be avoiding.
Forgetting Your Tax Bracket
It’s easy to think sometimes that a $5,000 pay rise is money you can spend or add to your budget. But unless the IRS has disappeared, you shouldn’t be forgetting that they’re entitled to a share of it.
With this in mind, it’s important to check if your raise means you will now be in a higher tax bracket. For instance, if your annual income is $150,000 with a monthly salary of $12,500, and you’re in the 24% tax bracket, a $5,000 a month raise would put you in the 35% tax bracket as your income would change to $210,000.
The best way to counter this is to try to reduce your taxable income by placing it in retirement funds such as 401(k)s or getting a health savings account (HSA). That way, you’re paying less tax and investing more in your future.
Looking to Spend More
Of course, you’re going to want to spend some of that hard-earned cash — maybe buy that new car you’ve been eyeing, or splurging on an expensive dinner for two. While you might think you deserve it, locking yourself into higher monthly payments or adding your raise to your spending budget may not be the smartest idea, especially if your pay rise boosts you into a higher tax bracket.
Instead of spending more money right off the bat and locking yourself into monthly payments for big purchases like a car, simply wait a couple of pay cycles before spending your newfound cash. This will give you more time to evaluate the purchases you want to make and get used to the added funds in your account.
Keeping Your Money in a Savings Account
If you’re already on the path to saving, that’s great! But if you’re keeping it lying around in a savings account — well, that’s not so great. A regular savings account won’t help your money grow, especially if inflation rates (or how fast your money’s purchasing power declines) outstrip bank interest rates.
In fact, if it doesn’t keep up with inflation, it might lose its value over time. Even worse, your savings are taxable, so leaving it lying around isn’t going to do you any favors.
There are plenty of methods to invest your money: stocks, gold trading, and so on. Moreover, a guest post by Club Thrifty’s Greg Johnson outlines four unique ways you can invest your money, such as crowdfunding real estate or owning a business. Discover ways to make your savings grow — it’s passive income, and any passive income is good income. Just be sure to do your research beforehand.
Not Having a Retirement Account
Aside from trying to grow your income, it’s important you keep your retirement in mind at all times. A salary increase means having more money to set aside for yourself, later on in life.
If your employer matches your 401(k) contributions, make sure to maximize it as much as you can. Take advantage of any auto-escalation features in your 401(k) plan, which can automatically increase how much you can contribute annually or when you receive a raise.
Aside from 401(k) plans, NerdWallet provides a variety of different retirement packages to consider, such as various types of Individual Retirement Accounts (IRAs). These include Roth IRAs, which provide tax-free earnings and withdrawals, and SIMPLE IRAs for self-employed individuals.
Receiving news about getting a raise is definitely worth a celebration, but it’s important to avoid souring a great milestone with bad decisions. With CPA financial planners stating that 41% of their clients live in fear of running out of cash, being smart with your financial decisions is the best way to give yourself a pat on the back. With any luck, your first raise will be the first of many you’ll receive and use wisely during your lifetime. And once you understand how to properly manage your money, you can avoid the pitfalls of these common saving mistakes.