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Got a Raise? Make the Most of It With These 4 Tips

Expecting a bump in your pay soon? You're not alone.

"A raise can be much more than
a bump in salary. When managed
well, even a relatively modest
raise can be part of a long-term
strategy to build wealth," said
Gerri Walsh, FINRA's Senior Vice
President for Investor Education.

Companies, on average, expect to provide employees with an average raise of 3 percent in 2018, according to a survey by the human capital advisory firm Willis Towers Watson. If you're among the employees due for a raise, it may be tempting to imagine the myriad ways you can treat yourself with your increased salary.

But before you get carried away, stop and think about how you can make the most of the extra cash so you aren't soon left wondering how you ever lived on less.

"A raise can be much more than a bump in salary. When managed well, even a relatively modest raise can be part of a long-term strategy to build wealth," said Gerri Walsh, FINRA's Senior Vice President for Investor Education.

If you want to maximize the impact of your raise, here are four ways to use the extra cash.

Increase Your Retirement Contributions

Consider bumping up your retirement contributions first thing, especially if you've got your credit and debt under control. Not only will this move will leave you better situated down the road—but paying yourself first doesn't even allow you to get used to the extra cash in your paycheck.

This may be a particularly good move if your employer offers matching 401(k) contributions and you haven't yet taken advantage of the full match. When it comes to matches, it's rarely a good idea to leave free money on the table.

Even if you are already taking full advantage of any matching contribution, it could be a good time to up your contribution if you are still under the federal maximum 401(k) contribution limit ($18,500 in 2018, or $24,500 if you are over 50 years old). You may also want to consider contributing to other retirement accounts, such as traditional or Roth IRAs.

Bump Up Your Emergency Fund

Could you come up with $2,000 in an emergency? About 34 percent of Americans probably or certainly could not, according to the FINRA Investor Education Foundation's National Financial Capability Study. And 54 percent of Americans don't have enough saved in "rainy day" funds to cover three months' worth of living expenses.

If you've been procrastinating on establishing an emergency savings fund, your pay raise could be a good excuse to get serious about saving for the unexpected. If you have direct deposit at work, ask whether you can send an amount of money each pay period to a separate savings account.

Pay Down Your Debt

Many consumers are bedeviled by high-interest debt, including credit card debt. In fact, the average U.S. household carries $16,061 in credit card debt, according to an analysis conducted by NerdWallet.com. More than half of Americans surveyed by the Federal Reserve said they carried a credit card balance at least some of the time.

A pay raise can provide a great opportunity to pay at least some of your debt before high interest APRs add hundreds or thousands of dollars to the debt load. If you need help coming up with a repayment strategy, here's a look at three options.

Re-evaluate Your Savings Goals

You don't have to use all of the raise for serious goals, such as building an emergency fund, debt-management or retirement. You can also use the pay bump as an opportunity to address your other financial goals. Would you like to buy a house? Or save for a vacation?

It's a good idea to assign each of your financial goals a price tag and a time frame, and then identify the kinds of savings and investing strategies that may be appropriate for meeting your goals. That might mean setting up separate savings or investment accounts for each major goal and choosing investments based on your time frame and risk tolerance.

Did you receive the bonus of your dreams? Check out 8 Smart Ways to Handle a Financial Windfall.

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