Be smart with your increase in pay


If your take home pay has increased this year either due to a raise or the tax law changes this could be an opportunity to make significant financial changes. There a few keys moves that can really can help you change your financial situation.
What should be the first consideration with the extra take home pay?
First and foremost, don’t just start spending more. We all have a tendency to not really recognize increased take home pay because we just absorb that income into our monthly budget and start spending more. We don’t really have anything more to show for it, it just becomes part of what we spend and nothing significant happens.
What are important moves to make regarding savings?
This extra money is a great time to increase your 401k savings rate and to also increase or start your emergency savings fund. Both of these moves have long term positive benefits and you won’t miss the money because you won’t be reducing your take home pay to make these changes.
Are there other important moves to consider?
If you have credit card debt, now is the time to increase the payments and accelerate the payoff timeline. Getting your credit card debt reduced is a great way to have even more money in the monthly budget in the future. Start with the highest interest rates first to save the most money.
Is there any other debt you should consider paying down quicker?
There is always the option to refinance your mortgage to a lower term and a shorter payment period. This will help you build equity faster and own your home sooner. This is especially a good move if you are over 50. It is important though that you are maxing the retirement savings and emergency fund savings first.
Do we need to use all of the extra take-home pay for these moves?
For most people, if they can use 75% of their extra take home pay on the previously mentioned moves, they can then use the other 25% on extra spending. It really comes down to limiting the amount your spending increases to less than what your take home pay has increased. This ensures that your spending doesn’t increase as fast your income.
Do you have any cautionary advice for anyone with extra income?
The most important move to not make is adding new debt when you get a raise or your take home pay has increased. Delay this new expenditure for at least 12 months. And make sure it doesn’t increase your expenses by more than the amount of your remaining increase after making all of the above moves.

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