Strategy For Annual Raise
How do you handle an increase in monthly income as a result of a salary increase at work? At my employer, they conduct annual reviews for all employees at the same time of year and right now is that time. As a matter of fact, I had my review on Tuesday and received very positive feedback. The actual merit increase has not been awarded yet but this got me to thinking about how to handle the additional funds.
Maxing Retirement Savings?
One good strategy to put yourself on the path to financial independence is to funnel your salary increase directly into savings. Given that you are likely following a monthly spending plan, you really do not *need* the additional income because you are already making due with your current income. Instead of frivolously spending that extra money, redirect it towards your 401k or other savings vehicles.
As an example, assume that you receive a 3% salary increase. Once the increase becomes effective, you can increase your 401k contribution by the amount of your salary increase. Before you know it, you will be maximizing your annual 401k contribution without cutting your expenses because you have maintained your original standard of living from prior to the raise.
Increase Debt Snowball?
Similar to the idea of increasing your retirement contributions, you can simply add the additional funds directly to your debt reduction snowball payment. You are following the snowball method of debt elimination, right?
The danger with this approach is that it requires a fair amount of discipline. If you are the type of person that might be tempted to spend that money as opposed to using it for debt reduction, this might not be the best approach to use. The important thing here is to be honest with yourself when assessing how well you will be able to implement this strategy.
It might not sound like a lot of fun to receive a raise and not be able to enjoy the fruits of your hard work that resulted in the salary increase. As such, you might find a happy medium where you split the salary increase between multiple goals. For instance, assume the same 3% increase as earlier. You might find it acceptable to direct 2% of the increase towards your retirement savings and the remaining 1% can be used for your living expenses.
Some people get so consumed by living frugally that they *fall off the wagon* and end up doing more damage than if they allowed themselves small pleasures along the way. Don’t get me wrong, I am not advocating that you spend all of the additional income but I can appreciate the desire to enjoy the *living* part of living below your means.
As of right now, my 401k contributions are being maxed and we are fully funding our annual IRA contributions. In addition, we do not have any consumer debt other than my 0% balance transfer sitting at HSBCdirect and our mortgage. However, given my ambitious goal of increasing my net worth by 35% in 2007, I am planning on directing the additional funds into my stock trading account and my general savings.
How have you handled your salary increases in the past? I’d be interested in hearing other ideas or how the ideas above have been a success for you.