December 15, 2016

What You Should Do With More

Credit: iosphere at
Earlier this fall the U.S. Census Bureau released exciting data showing that real median household income grew an average of 5.2% in 2015 versus 2014. This represented the first statistically significant increase in income for the middle class since 2007. For the first time in almost a decade, most people have gotten a raise! This good news coupled with it being near the end of the year when sometimes employees are lucky enough to get a raise or a holiday bonus got me thinking that it might not be a bad time to suggest some things you might want to do with your additional income.

If you are fortunate enough to have additional income coming in, in general, here is what I would recommend you do, and in this order:
  1. If you are getting a raise, do a little math and see how much more money you will be bringing in each pay period after taxes. That is valuable information to know as you consider your budget going forward.
  2. Have some fun! Sure, I’m a numbers guy and a financial advisor, but I also know you only live once. Celebrate your hard work paying off and go eat at that new Italian place, buy that outfit you’ve had your eye on, or get that latest device. Now I’m certainly not suggesting you should blow all of your additional income, but I do think you should live just a little.
  3. If your cash rainy day / emergency fund is still not up to at least 3-6 months’ worth of your living expenses, it’s probably a good idea to direct your additional income to rectifying the situation. It’s not an exciting use of assets, but trust me, you will be glad you have a cash safety net in place when life throws you a curveball, and it will!
  4. As long as your modified adjusted gross income (MAGI) is below $132,000 if you are single or $194,000 if you are married and file a joint tax return, you should be eligible to contribute up to $5,500 to a Roth IRA ($6,500 if you are over age 50). This is a great way to save for retirement, and with any luck, your savings will compound over time into a larger tax-free asset.
  5. If you have any high-interest credit card debt or you are close to paying off a student loan or car loan and that will erase a fixed, monthly expense, I’d suggest you plow your additional income into your liabilities. It will save you interest expense and improve your financial situation.
  6. Top off your 401(k) or retirement plan. Unless you are already contributing the maximum amount, with additional income you should be able to contribute more to your retirement plan. This is a great way to boost your retirement savings and defer having to pay taxes on your additional income until you withdrawal money from your retirement plan later on.
  7. Put some extra towards your mortgage or other long-term debt. Again, it’s not an exciting use of your assets, but it will save you interest expense and speed up your progress towards being debt-free!
  8. If you are already charitably inclined, consider paying it forward and using your additional income for enhanced charitable giving, greater support of a cause you feel passionately about, or just helping out someone who you know could use a little help.
They say with more power comes greater responsibility. I agree, but I’d also say with more income comes greater possibility! If you are fortunate enough to have experienced a bump in your income or know you are about to get a raise or a bonus, use it thoughtfully. Have a little bit of fun, but also make it count!

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