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Make the Most of a Pay Raise

Congratulations! You’ve just left a meeting with your boss to discuss your annual performance review and learned you are getting a pay raise.

While that is great news, if your company is like many others, don’t expect it to bring a life-changing cash windfall. In fact, the Society for Human Resource Management says the average merit pay increase in 2020 was 2.6%. If you earn the median household income of $62,000, that translates to an extra $1,600 per year or about $134 per month before taxes.1

So, how can you make the most of your raise, regardless of how large or small it may be? Here are some things to consider.

Pay Down Debt

Whether it’s a credit card balance that just keeps growing, or a car loan you’d like to pay off early, reducing debt is an important component of financial planning. If you are working to pay down debt, a raise can help move you to your goal more quickly.

Create an Emergency Fund

Surprises happen. The refrigerator stops working. Your child needs unexpected dental care. Your spouse is laid off. An emergency fund helps get you through those financial hiccups more easily. Consider using your raise to establish, or add to, your emergency savings account, separate from your checking account. Set up automatic deposits into that account. The “set it and forget it” approach works best to help you be consistent and meet your savings goal.

Add to Your Retirement Savings

If you feel you already have a solid handle on your emergency savings and a manageable amount of debt, another great option is contributing to your retirement. You can consider adding or increasing any traditional contributions as well as those that your employer may match. Tax-advantaged retirement accounts let you sock away all or part of your new income without losing part of it to taxes. Invested in a 401(k) or IRA, that $134 is a wise investment if you invest it before tax deductions. While it may seem like a small amount to invest, that monthly investment over 20 years could grow substantially.

Don’t have a Roth IRA? A pay raise might present a great opportunity to add one to your retirement portfolio. With a Roth IRA, contributions are not tax deductible now, but your account grows tax-free and withdrawals are tax-free. Hold the account for five years in order to avoid paying taxes or penalties on the earnings. Depending on where your IRA is held, keep in mind there might be additional fees and risks to consider. (Earnings can be withdrawn after age 59 1/2.)

Reward Yourself!

Life is not just about financial planning. You’ve worked hard, so don’t skip out on enjoying some of the fruits of your labor. Do something for yourself, whether it’s setting aside for a family trip or treating yourself to a shopping day. Reward yourself with something that brings you joy and fits reasonably within your budget.

Consult Our CFS2 Financial Advisors

For guidance and support planning for your long-term goals, contact the CFS Investment team at UFCU to learn more.


1 CFS does not provide tax or legal advice. For such guidance, please consult a qualified tax and/or legal advisor.

2 Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. UFCU has contracted with CFS to make non-deposit investment products and services available to credit union members./p>