by Jennifer Wallis
You’ve been plugging along, living paycheck to paycheck for as long as you can remember. Finally, miraculously, one glorious day, you catch a break and you land a much better paying job. Your income skyrockets up to an amount you can barely imagine. It’s a great problem to have, right? Yes, it certainly is. But, if you aren’t careful about how you deal with that influx of cash, you could soon find yourself back to living paycheck to paycheck.
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As a financial counselor for nearly 16 years and senior writer at BetterBudgeting, I’ve seen it over and over: The more you make the more you spend. I’ve counseled doctors, lawyers, and many other professionals that made hundreds of thousands of dollars a year but had hundreds of thousands of dollars of credit card debt. So, before you think that all of your problems are solved because your income has increased, proceed with caution.
Follow these steps to really beef up your bank account instead of sadly moving into a higher class of poor.
1. Pay Off Existing Debt
With your new cash, it’s a great time to increase payments to any existing credit card, medical, or collection debt that you may have. Target small balance accounts first so you can get those out of the way. Then, start plugging away at the high interest accounts until they are paid off. After you’ve taken care of your unsecured debt, pay off your student loans, personal loans, and auto loans. If you aren’t sure who you owe, get your credit report.
2. Boost Your Emergency Savings
Everyone should have at least $1,000 in an emergency savings account. When that amount is socked away, work toward having 3-6 months of living expenses in easily accessible savings.
3. Plan for the Future
If you have kids, college savings can be a good goal. There are pros and cons to 529 savings plans so weigh them carefully. Retirement is also an important goal to save for. If your employer matches your contribution in a 401k or 403b plan, max out that contribution to take advantage of free money. After that, consider contributing to your own IRA (Individual Retirement Account).
4. Pay Off Your Mortgage
Even though interest rates are low on mortgages, it’s still a good idea to pay it off if you can afford it. Make extra principal payments when possible.
5. Don’t Take on New Debt
The biggest mistake that people make when they pay off debt is to celebrate by taking out new loans. It sounds funny but it’s true! With your new income, try to pay cash instead.
6. Don’t Immediately Upsize Your Life
Many people rush out and buy a more expensive home and/or car as soon as their income goes up. Those are purchases that aren’t easily disposed of. At least follow steps 1-3 first and make sure the new career looks like it’s going to last first. You certainly don’t want to find yourself with a supersized mortgage, your dream car payment and no job.
Once your debt has been paid off, your savings pumped up, and your job is solid, only then should you consider any major purchases. Living below your means is always a safe bet. No one knows what the future holds. While it’s great to celebrate your inflow of cash, proceed with caution when it comes to spending too much of it too soon.
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Copyright © 2013 by Jennifer Wallis. All rights reserved.