Though raises are never a given, a large number of U.S. employees are fortunate enough to get a bump in pay year after year. And although the average annual increase nationwide is just 3% annually, it’s far better than no raise at all.
But regardless of how much your salary increases year after year, it’s important to put that added cash to good use. And thankfully, a large number of Americans seem to be treating their raises responsibly.
According to a TD Ameritrade survey released earlier this year, 22% of workers plan to put their raises directly into general savings, while 20% expect to use that money to fund their retirement accounts. And while 16% expect to need that money for daily expenses, 13% say they’ll be using it to pay off existing debt. If you’re expecting a raise this year, or have gotten one already, you’ll be doing yourself a big favor by putting that money to good use — even if it means forgoing some instant gratification along the way.
Do you have emergency savings?
A 2016 GOBankingRates study revealed that a whopping 69% of Americans have less than $1,000 in savings. Worse yet, 34% have no savings to show for at all. If you’re part of this statistic and manage to get a raise this year, you’d be wise to stick that money directly into the bank. That’s because regardless of what your expenses look like or how much you earn, you need an emergency fund with enough money to cover three to six months’ worth of living costs. Otherwise, you risk running into a situation where you’re forced into a spiral of debt.
Remember, you never know when an unplanned expense might throw your finances for a loop. Even if banking your raise doesn’t get you close to that three-month savings goal, it’s a step in the right direction toward eventually building that safety net.
Are you saving for the future?
Because the typical American can’t live off Social Security alone, we all need some form of additional income to stay afloat financially down the line. And since most of us aren’t collecting a pension, we’ll need to take matters into our own hands.
If you’re behind on retirement savings, or want to grow your nest egg as much as possible, putting your raise into an IRA or 401(k) is a smart way to utilize that additional money. And because dedicated retirement accounts allow your money to grow tax-deferred (or, in the case of a Roth account, tax-free), you’d be surprised at what a series of small contributions can turn into over time.
Imagine your raises put $1,200 extra in your pocket each year, and that you invest that cash for retirement over a 30-year period. Assuming your investments can generate an average annual 7% return, which is feasible with a stock-heavy portfolio, you’ll wind up with a $113,000 nest egg. That’s a far better alternative to blowing your raise on nonsense.
What does your debt situation look like?
As of last year, the average American household had $5,700 in credit card debt. And as you probably know, credit card debt is pretty much the worst kind to have. If you’re staring down a pile of debt and have the option to use your raise to pay it off, you’d be wise to start chipping away at that total — because the sooner you do, the less money you’ll end up throwing out on interest.
Say you’re able to use your raise to knock out a $1,200 credit card balance at 20% interest in a year’s time instead of two. You’ll wind up saving yourself $126 in interest charges — and that’s money you can use to pad your emergency savings or apply toward an essential purchase.
If you’re the proud recipient of a raise this year, you may want to think twice before spending that cash on something trivial. In the long run, you’ll be much happier for having used it responsibly.
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