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Investor Tips

Getting a Pay Raise? Do This First

FINRA Staff
Rising steps made of one american dollar banknotes

Expecting something extra in your paycheck soon? You're not alone.

"Have fun with some of
that money, but if you
reduce debt and save
some of it, too, it can
pay huge dividends
down the road."

Employers expect to provide employees with an average raise of 3.1 percent in 2019, according to a recent survey by the advisory firm Willis Towers Watson. If you're among the employees due for a raise, you might be surprised at just how much even a modest salary bump can improve your financial fortunes.

"Have fun with some of that money, but if you reduce debt and save some of it, too, it can pay huge dividends down the road," said Gerri Walsh, president of the FINRA Foundation. "Time is your friend when it comes to saving: If you save $100 a month, at a 5 percent rate of return, in 30 years you'll have over $80,000."

Here are four smart uses for the extra cash that comes with a raise.

Pay Down Debt

A raise is an opportunity to chip away or eliminate high-interest debt, such as credit card debt. Few money-management strategies pay off as well as, or with less risk, than paying off all of your high interest debt. Chipping away at high-interest debt can save you hundreds, even thousands of dollars in the long run.

TIP: Consider funneling the extra cash from your raise to one of these three debt repayment strategies.

Boost Your Emergency Savings

If something unexpected came up, like a medical or car expense, could you come up with $2,000 within the next month? About 34 percent of Americans probably or certainly could not come up with that money, according to a study by the FINRA Investor Education Foundation. 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 great motivator to get serious about saving for the unexpected.

Increase Your Retirement Contributions

A pay raise can be an opportunity to put additional money into your retirement savings. If your employer offers matching 401(k) contributions, one wise way to use your raise is to increase your 401(k) contribution to take greater advantage of your employer's 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 ($19,000 in 2019, or $26,000 if you are over 50 years old). You may also want to consider contributing to other retirement accounts, such as traditional or Roth IRAs.

Invest in your future.

Saving for retirement is always a solid financial goal, but most of us have other financial goals, too. Your raise could be a step toward achieving them. Make a list of your financial goals and estimate how much each will cost. Want to go on a fabulous vacation? Get a degree? Buy a house? Save for a child's education? Write it all down. Then, separate your goals into categories—short, medium and long-term—and set up savings and investment accounts for each one. It's easy to think you're saving enough money, but keeping separate accounts allows you to keep track of exactly how close you are to achieving each goal.

Subscribe to FINRA's The Alert Investor newsletter for more information about saving and investing.