Congratulations on your raise. What to do with the extra income?
Human experience management, or HXM, is about shifting the focus to treating employees as individuals and not simply as company assets. This also means recognizing that employees have a life outside the office. With that in mind, the latest blog in my series on financial well-being tackles the question of what to do with the extra money you may receive this time of year in form of a bonus or a raise.
With more money coming in each pay period, you might be tempted to head for the nearest mall, or shop at your favorite store online. But is that the best thing you could do with the extra cash?
I’m leaning again on Ilyce Glink, syndicated financial columnist and CEO of the award-winning financial wellness platform Best Money Moves (available on SAP App Center) to help me answer this question. Being smart with a financial windfall can mean the difference between a lifetime of paying down debt and building up a pot of cash you can use for emergency reserves or to fund your retirement.
The problem is, when you get a bonus or a raise, you typically adjust your standard of living to incorporate that extra cash. Some people will pay off their holiday credit card debt with their annual bonus, or will decide to take a trip rather than building up an emergency reserve.
“Banking your bonus or raise will allow you to build up a reserve in case something goes wrong, or get a jump start on saving for retirement or some of the things you want to do,” Glink says. Here are four things she suggests you do if with this year’s raise or bonus (some tips targeted at people working in the US):
- Add to your 401k. If you’re not already participating in your company’s 401k plan, consider putting an amount equal to your raise into your 401k each month. Because the money that goes into a 401k is tax deductible, it gets subtracted from your gross earnings as opposed to your net income. If your company offers a 401k match, be sure to siphon off enough of your paycheck to get the full match.
- Start a Roth IRA. If you’re already maxed out on your 401k, consider funding a Roth IRA with after-tax income. For 2020, you may contribute up to $6,000 in contributions (up to $7,000 if you are 50 years of age or older) if you earn less than $124,000 as an individual (up to $206,000 if you’re married, filing jointly). You get to choose how the cash is invested and can withdraw your contributions after five years without paying a penalty and you can withdraw up to $10,000 for the purchase of a first home, so it’s an effective savings vehicle.
- Pay off your debt and make 2020 a debt-free year. If you get a lump sum in a bonus or commission check, and you’re carrying credit card debt, consider putting all of your windfall toward getting that debt paid off. If, after using up your bonus, you still have debt, continue making payments at the same amount before you applied your bonus and vow to get all of your debt paid off in 2020. At the very least, pledge to not add any additional debt to the mix.
- Start saving your extra cash for a big purchase, or to just have options. What big things would you like to do in 2020? Take a trip? Plan a wedding? Buy a house? Once you get your emergency account funded (ideally with two to three months’ worth of expenses), you can set aside some of your raise or bonus to build up your savings. Ask HR if you can take $100 per pay period and send that to an account that’s separate from your regular checking account. If you continue to put away $200 per month, you’ll have $2,400 saved (painlessly!) over the course of the year.
“If you focus on living your life as if you never got that raise or bonus, you’ll be amazed how quickly your savings begins to pile up,” Glink adds.
To learn more about SAP SuccessFactors Human Experience Management Suite (HXM) tap in the HXM Digital Summit for on-demand webcasts, research, articles, and more. Learn more about Best Money Moves and other innovative apps that complement SAP SuccessFactors HXM Suite on SAP App Center.