2 Things You Should Do (and 1 You Shouldn’t) When You Increase Your Income
Team Member Blog, Consumerism to Frugalism
Most of you would like to increase your income.
Whether you’re looking to make a career move, change companies, start a business, or simply move up in your current situation, making more money is likely one of the major factors in your job decisions.
Here at Money Saved is Money Earned, we know money isn’t everything and you shouldn’t live just for money. However, we also know that money plays a major factor in your ability to live the way you want.
While we should live within our means, most people would make very different choices if money wasn’t an option. Having said that, money should never be the end goal.
What’s really at the heart of the drive for more money is the desire for more freedom and power: over our life and the choices we make about it, as well as our ability to influence the world in the ways we care most about.
Money is nothing more than the means to an end.
Unfortunately, most of us will not win the big lottery, start a billion dollar company, or inherit millions. This means that while our incomes may increase over time that increase will likely be gradual, and may come in the form of step or merit-based raises, bonuses, or commissions.
However, most people find themselves spending money as fast as they make it, gradual increase or not.
With these points in mind, what SHOULD you do if you find your income increasing?
Luckily, we’re here to help.
Here are 2 things you should do when you increase your income and 1 you shouldn’t.
Things You SHOULD Do :
1. Pay off Debt
We know we play this tune like a broken record, but paying off your debt as fast as you can is one of the most effective ways of having Money Earned through Money Saved.
In fact, paying off debt is second only to not accruing debt in the first place!
The reason paying off debt as soon as possible is so impactful is because of interest.
Essentially, any loans you have you will pay interest on, which gives the lender extra incentive for loaning the money in the first place.
The trick with paying off debt at a faster pace than your loan term lies in the fact that any extra you pay goes directly toward the loan balance and not to interest.
Thus, making extra payments lowers your overall balance, which lowers the interest paid, which lowers the total amount you will pay to the lender.
Depending on the size of the loan and how much extra you put toward it, the impact on the total you pay can be quite astounding.
For instance, making extra payments on a mortgage could save you upwards of $30,000 in interest and several years on the life of the loan!
Not only does paying down your debt help you to save on interest and shorten the life of the loan, having less debt helps you maintain financial flexibility.
Say your car dies and you need another one, or you get in an accident (heaven forbid) and have medical bills. What if you get laid off or get sick and need to miss work?
If your debt to income ratio is maxed out you’ll be hard-pressed to get more credit no matter how great your credit score is or how much you make.
This is why it’s so important to focus on paying down any debt you do have as fast as possible and to try and keep it paid down. Not only will you be saving on interest and getting out from under loans faster, you’ll be able to handle any unknowns that may come up that could require you to accrue more debt.
Long story short, if you increase your income one of the first things you should do with that money is to pay down your debt.
Along with paying off outstanding debt, the other thing you should do if you increase your income is to invest it.
Many people make the mistake of waiting to invest. They usually have many expenses (lots of debt), little savings, and things they’d rather spend their money on.
We get it. If you’re making good money for the first time in your life the first instinct is to reward yourself by upgrading your lifestyle. You’re young, and so you think that you’ll have lots of time to invest later.
While this may be technically true, investing is more impactful the longer you do it. In other words, you’ll get the most out of your investment the sooner you begin, and you’d be surprised how big a difference even a few years can make.
Once again it’s the interest at work, but this time in a way that pays you.
Now, instead of you paying interest to borrow money, investment companies are paying you interest to use your money in the stock market and other endeavors. You’ll get all the money you pay in back, plus interest, and the bigger the pot grows the more interest will be made off it.
There are many different types of investments, but a critical move YOU MUST MAKE is to enroll in your employer-sponsored retirement account.
These will be different depending on whether your employer is the government/state or a private company. If you work in a state job you will automatically be enrolled in a retirement program with an employer match of deposited funds.
However, if you work for a private company you will need to make the choice to enroll in the plan, which also typically features an employer match in funds. These retirement accounts are state-employee accounts and 401(k)’s.
There are other options for investment as well. You can enroll in employee-sponsored 403(b) supplementary retirement accounts, which are in addition to your regular retirement accounts, or begin a Standard or Roth IRA.
Other options may be to buy stocks and bonds yourself, or to establish a stock investment account with an investment company so you don’t have to worry about managing the money day-to-day. You will have the option to invest in liquid accounts (meaning you can take your money whenever you want without penalty) or term accounts (meaning you cannot take the money until a certain time without paying a penalty).
Whatever investment you decide to make, it’s critical that you begin planning for retirement and your future self as soon as possible. A report in Time Magazine recently estimated that 1 in 3 Americans have nothing saved for retirement, and another report by SmartAsset found that 29% of those over 55 have no savings or pension!
Trust us, you do not want to be forced to work when you are elderly, or worse, not have enough money to live comfortably and no means to get it.
Once you’ve paid down some debt, put that $100 a month raise into a retirement or other investment account and watch it grow.
The 1 Thing You SHOULD NOT Do
We’ve already talked about the 2 things you should do when you begin making more money, but what about what you shouldn’t do?
This one is really simple, but difficult to put into practice.
Remember earlier when we said it is really tempting to upgrade your lifestyle when you begin making better money?
Yep, the 1 thing you SHOULD NOT do when you begin making more money is accrue more unnecessary debt.
Again, we get it. You have more money and the impulse is to spend it. We live in a consumerist world. That is what we are trained and encouraged to do.
But did you know that some reports find that as many as 42% of Americans live paycheck to paycheck, and that around 25% of those people make more than $100,000 a year?
The only possible explanation for this finding is that people are spending way more than they should be on unnecessary things, and often the more money you make the more you spend it.
For example, let’s say you’re a teacher in Oregon and you get your Master’s degree. In many districts, that degree equals a $10,000 jump in salary, which is equal to roughly $533 more dollars in your pocket each month (after taxes).
That’s a lot more money every month, and every year (about $6,396), and it’s VERY tempting to use that extra money on a fancy new car, shopping, or an expensive trip.
But do you really need those things?
Is your daily driver chugging along just fine? Are you in need of new clothes or other items? Can you take a vacation utilizing miles and points and save money?
More often than not, the things we are tempted to buy when we get a little more money are items that give us short-term satisfaction in exchange for long-term financial stress.
They just aren’t worth it when you can use that money to pay down debt you already have or save for the future.
We have several spending rules to live by here at Money Saved is Money Earned.
Don’t make a large purchase until you’ve paid off existing debt except for in an emergency.
If it isn’t broken, don’t buy another one. Seriously.
Moral of the Story
Most of us (hopefully) will come to a point in our lives where we are making more money. Maybe we changed careers, took a different job, or got a big raise.
Whatever the circumstances, it’s important to know how you should handle your newfound income to give your current and future-self maximum financial freedom and flexibility.
First, you SHOULD use that new income to pay down existing debt in order to save money on interest, get out from under loans, and to be prepared to handle unknowns that may force you to accrue more debt.
Once your debt is tackled or reduced, you SHOULD look to invest a portion of that extra money for your retirement, either in an employer-sponsored plan, through an investment company, or an investment you manage yourself.
Whatever combination of debt paying and investing you decide on, you absolutely MUST RESIST the impulse to use your extra income to accrue unnecessary debt. Don’t make any large purchases until your debt is paid down unless absolutely necessary, and even then if it’s not broken then don’t buy another one.
Remember, the best method for getting more money is some combination of increasing your income and decreasing your spending. By paying off debt, investing, and not accruing more debt you are effectively doing both, which will pay off big time in the long run.
Resist consumerism, turn to frugalism.
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