Online message board Reddit has taken the world by storm. You can find information on nearly any topic you can imagine on Reddit, often from the first-person experiences of community members. This makes it a very interesting source of information, especially if you’re dealing with something in your life that’s out of the ordinary.
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If you suddenly get a huge raise, for example, you might need some real-world knowledge about how to best handle that sudden influx of cash in the best way, maximizing its value and not frittering it away. This exact situation was discussed recently on Reddit, and some of the responses from the online Redditors were thoughtful, well-reasoned and right on the money.
Of course, as with any information you receive, particularly regarding finances, you should take all you read on Reddit with a grain of salt and verify it with additional sources. But, if you can find reliable posters, you often can glean helpful insights into your own personal situation based on the advice of others. Here are some examples.
Take Advantage of Compound Interest
According to Reddit user Puzzlehead-Bed-333, “Compound interest is your friend and is vitally important for retirement. It comes faster than you know. Max out your 401(k) ($22,500), open an IRA, max out a backdoor Roth ($6,500), HSA if you qualify.”
The math bears out Puzzlehead-Bed-333’s comment. Imagine you’re 30 years old when you get your big raise, which allows you to max out your 401(k) and backdoor Roth IRA to the tune of $29,000 annually ($2,417 monthly), as the Redditor suggests. By the time you’re 65 years old, if you earned a 10% annual return on that money, you’d be sitting on an incredible nest egg of over $9 million.
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Pick a Good Advisor
With any sudden influx of money, be it from a massive raise, an inheritance or a lottery win, it makes sense to consult with a financial advisor. Even if you think you’re generally good at handling your money, your financial life will change considerably once you’ve got a lot of it. A good financial advisor can help take emotion out of the equation and guide you on a path that can both protect and grow your money. So what should you like for in a good advisor? Redditor BizCoach suggests you find a financial planner with these three characteristics:
- They are a fiduciary — i.e., required to act in your best interest
- They are fee only (no commissions)
- They are likable and speak in language you understand.
Build Your Emergency Fund
An emergency fund is the cornerstone of any solid financial plan. If you suddenly earn a lot more money, you’re in a good position to build a generous emergency fund that will help keep you out of trouble if and when you run into one of life’s unexpected financial surprises, like a car repair, a sick relative or an uncovered medical expense.
This is the advice offered by Reddit user SteamCleaner23, who says you should “immediately calculate six months’ living expenses. … You can max out an emergency fund in a few months. Do that first.”
Live on Your Old Salary
One of the oldest financial tricks in the book is to live off your former salary in the event of a raise or sudden improvement in your financial situation. The idea is that you were able to live off your former salary before you began earning more, so if you allocate your new money to savings and investments instead of simply bumping up your lifestyle, you’ll come out far ahead in the long run.
This sentiment is echoed by Redditor RichD1187, who suggests that you should keep living on your former salary and even bump it up by a little bit “if it makes you feel better. Do that for the next 10 years while maxing out any and all retirement accounts you qualify for.”
Be Careful Who You Listen To
If you ask 100 people how to manage your money after a big raise, you’re likely to get 100 different answers. You have to be careful whose advice you take, because it’s often easy to get distracted by the flashiest pitch rather than the most sensible option.
For example, you might read on Reddit that a user made $1 million in six months by trading in and out of cryptocurrencies. They can make it seem so easy that you overlook the incredible risk on the downside, that your investment could literally become valueless.
For this and many other reasons, Redditor DRealLil may have hit the nail on the head better than anyone with his advice: “First step: Get off of Reddit.”
While perhaps a bit tongue in cheek, the point is that even if they offer solid information no Redditor knows exactly what your personal financial situation is, let alone your investment objectives and risk tolerance. While you can indeed find solid advice on Reddit, always be sure to vet it with additional sources, such as a licensed financial advisor.
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