What should I do with the extra income I will be earning from a promotion?
I am 26 years old, married, and have three kids. I was recently promoted. I will now have an extra $300-$400 in income and I'm not sure what I should do with it. I have about three months of expenses saved as an emergency fund. Should I invest my extra income or put it in a savings account? I'm new to investing and not sure what I should do with a little extra income.
What a nice problem to have. And congrats on the promotion. First, I would increase the emergency fund to at least six months of expenses. Then clear any debt you may be carrying at more than 4-5% interest. Your next priority might be to take maximum advantage of any 401(k) match your employer may provide. At that point, you may want to start some college savings plans for the children if you have not already done so. Or perhaps save for specific major purchases like a car, appliances, etc. The goal here is to never pay interest on anything again, except for a mortgage, which is at the lowest rates you will find and it's tax deductible. (Car deals at promotional rates will have the "interest" built into the price. There is no free money.)
The best to you and your family.
Congratulations on the promotion and on the wisdom to plan what you want to do with the extra income. I have three recommendations for you to consider – and doing a little of each would also be an option.
First, investigate whether your employer has a 401(k) or other retirement plan and if your employer offers a match. If they do, start by contributing at least enough money to get the full match. Your HR department should be able to help you with the calculations. Here is an example to show how a match works: Say you make $3,000 per month (before taxes) and the employer matches up to 5%. If you put $150 into your 401(k) your employer would put an extra $150 into your account. [$3,000 x 5% = $150] Basically, you just get free money for contributing to your retirement savings, so it's like a promotion on top of your promotion. As for what investment to choose, if you don't have a fiduciary and fee-only financial advisor, you should consider a target-date fund for your investment (assuming the plan has them).
Second, consider beefing up your emergency fund to at least six months of expenses (or even more). With three young kids, emergencies will crop up regularly such as medical visits and braces. Additionally, a job loss won't just impact you and your spouse, but will also impact your children. Having additional emergency funds at this time of life can be extremely important to the financial safety of your family.
Third, make sure you don't have any high-interest debt eating away at your finances. I would consider any interest rate above 5% to be high-interest in this environment (2018). If you do have any debt like this, consider allocating a portion of the raise to paying down the debt. Every dollar you pay down keeps more of your future money in your pocket, rather than going to a credit card company or other lender.
It is hard to get too specific without knowing much else about you or your goals. I would say kudos to having 3 months of reserve in an emergency fund. As a guide I'd look to be saving money monthly in cash, 401(k)/IRA, and possibly some non retirement or college account. Those should be the typical focal points of a young family. I'd make these things automatic and never look back. Certainly if there are specific goals you are looking to save for above and beyond that they should take some level of priority. The most important thing here is make sure you start that retirement savings nice and young so you can have a healthy retirement in the future.
Hello, First of all congrats! Ok so we are missing some factors here for fantastic advice giving but I’ll go the blanket advice route for now.
1) Some things to consider? Whether you have debt and what kind.
Using this money for debt pay off will put you in a position to be debt free and have create greater savings opportunities in the future.
2) Emergency savings
3 months is a great start but I’d bump that up since you have the kiddos. You didn’t mention whether you are the sole provider. If that is the case I’d work toward 6 months. This money can go into a high interest savings like Ally for example. They pay around 1.6%. I have ZERO ties to Ally, just using it as an example.
3) What are your other savings goals? A house? A car?
I love buying cars cash so I promote tossing a car payment into savings so you can buy one cash when you NEED one.
4) Long term savings
What do you have available for retirement savings via your employer. Make sure you are getting that entire company match if they have one and you are not already. If you still have more to save then consider putting more in. If you are young and in a lower tax bracket (check because no one ever thinks they are in a low tax bracket) then roth contributions into your retirement plan may make sense. If you are in a high income tax bracket you may consider the traditional contributions. This is not a set it and forget it type of decision.
5) Protection against lost income:
if you are unable to work or if you pass away you will want to make sure that you can replace your income somehow to keep your family going financially. A term life policy can help with this and consider a disability policy. If you need help finding a company hat does his speak to a fee-only advisor and one of us can point you in the right direction.
A couple additional items I can’t help but toss in:
1) Consider using a budgeting/cash flow management tool like You Need a Budget. There are many pros to using this that go beyond budgeting
2) Now is a perfect time for you to create financial policies. For example “our family wants to be debt free by x date and we want to have $5,000 a month in retirement so any windfalls we receive will be put toward y” Y standing for the first thing that needs to be done to hit your goals. If it’s debt then all extra windfalls go towards debt and maybe one celebratory dinner (you have a live a Little right?) if you put policies in place you are less likely to have emotions wreck your plans. If the president gets re-elected or not, you stick to your policy, if the economy pulls back you stick to your policy, etc.
You are in a great place in your life to start right. I wish you the best in your financial journey. If you ever want the help from a Professional. It’s out there and without high investment minimums. We exist on the XY Planning Network and we love to help.
First let me say congrats on planning and putting yourself and your family in a positive position in case of an emergency.
I believe that you have to write down your goals and them prioritize them. For example, you are 26 and you have a family. Is it more of a priority for you to begin to save/invest for retirement or potentially saving/investing for your childrens education? It may be possible to do both if you so desire.
Once you prioritize your goals then you can begin to make preparations to strategically fund those. I am not sure of the age of your children but it is possible to contribute to a IRA or Roth if you don't have a 401K and add funds to three separate accounts for the kids. Is it possible that you need more insurance? Health, Life, Dissability?
Upon gaining an understanding of your priorities you then can seek to invest for those goals. At 26 years of age, I would consider investing simply because you have time to ride the ups and downs of the market and take advantage of market returns. Dollar cost averaging may be the most effective and efficient way for you to reach your investing goals.
In conclusion, think about what you want to achieve and where you want to be in life, prioritize your wishes, and then invest.
-Jason M. Fields