Maximize Your New Salary or Income Increase

There’s a saying about money management that goes something like this:

“It’s not what you make. It’s what you do with what you make.”  

Of course, how much money you make is important. However, what you do with what you make is just as important, because the choices we make today shape our financial future.

Here are three ways to maximize your increasing paycheck to positively impact your financial future.

1. Avoid Lifestyle Creep

Avoiding lifestyle creep is tough. We often want to take an income increase and spend it: move into a larger apartment, buy a new(er) car, or splurge on a vacation. But to maximize our future financial stability, we need to prioritize and focus that income on our future goals.  

Examples of future goals are: building a substantial savings, paying down high interest debt, saving for down payments, and setting aside money for our 65 year old selves in retirement.  

Make a plan for your income and be careful not to let current desires steal from future goals. The Consumer Financial Protection Bureau (CFPB) has some helpful information on how to make a budget and stick to it here.

2. Boost Savings

Savings gives you choices, saves you from high interest debt, and reduces the stress that comes with unplanned bills.  

• Use your income to fund a savings account for emergencies, such as unexpected car repairs or dental work and larger issues like unemployment or a major health problem.  
• Use auto-deposit to consistently set aside money each month directly into a savings (not checking) account.  
• Set an initial goal of $1,000 in savings. Then, keep saving with every paycheck until you’ve set aside 3 to 6 months of living expenses. 

3. Build Your Retirement Savings

Although retirement seems a lifetime away, the earlier you start saving, the more your money will grow. 

• Take advantage of the “time value of money” and begin setting aside money in your employer’s retirement plan (401K, TSP, 403B, etc.) or an IRA (Individual Retirement Arrangement). Well invested, the $100 you save at 25 years old could grow to $1,600 at age 65.
• Maximize an employer’s offer to match retirement contributions. For example, if an employer has a match on retirement contributions up to 5%, when an employee (you) saves 5% of pay in the retirement account, the employer throws in 5% as well—doubling the money! Every employer is different, so check with your employer’s Human Resources benefits department for specific information.

One final tip: Although saving for retirement is vital for your future financial health, be sure to prioritize and continue to save in regular, non-retirement savings as well. There are penalties for pulling retirement funding early—so you want to use regular savings for life’s emergencies and NOT retirement accounts. Put a fence around retirement and let it grow for your future, older self.