What Should You Be Doing With Your Money When You’re Earning the Most?

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If you’ve recently received a raise or switched jobs to get a higher salary, congratulations! Especially in a time of high inflation, the more income you can pull in, the more breathing room you should have in your budget.

But if you don’t put a plan into place regarding what to do with that money, you might find that it mysteriously gets spent without any visible improvement in your financial status or quality of life. When you’re earning the most, it’s critical to make those income gains last with prudent financial actions — like these listed below.

Pad Your Emergency Fund

If you come into additional money, padding your emergency fund should be one of your primary priorities since it can help keep you out of debt when life’s surprises hit. Although you can never predict what emergency might befall you — be it an unexpected, uncovered medical bill or a critical car repair — you can be certain that you will have financial surprises throughout your life. This may even include suddenly losing the job that is providing you with high earnings.

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Since credit card debt is a financial sinkhole that can prevent you from reaching your financial goals, you want to avoid taking it on at any cost. With an emergency fund covering at least three to six months of your expenses, you can help protect against turning a temporary problem into an ongoing drain on your cash flow.

Pay Off Your Consumer Debt

Although an emergency fund can help prevent you from falling into debt, if you’ve already got existing credit card debt, you’ll want to pay that off as soon as possible. Once you start earning more money, one of your first courses of action should be to take that extra money and funnel it toward paying off your credit card debt.

With average credit card interest rates now exceeding 20%, your debt can double in just a few years if you don’t attack it aggressively. Once your debt is paid off, you’ll be able to redirect that cash flow — that was essentially just going straight down the drain — toward more productive pursuits, like investments.

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Maximize Your Retirement Plan Contributions

Your retirement plan is likely the greatest contributor to your lifelong wealth. Thanks to the tax-deferred growth retirement plans provide — and the matching contributions you may earn in the 401(k) plan your employer offers — your investment balance can increase dramatically over time.

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Money you contribute to most retirement plans is also tax-deductible, meaning you’ll also enjoy an immediate tax benefit while you are waiting for the long-term benefits of the plan to kick in. With a newly increased income, you can boost your retirement plan contributions without even feeling any pain of digging deeper into your monthly cash flow. So be sure to “pay yourself first” and direct that money towards your retirement plans before you “accidentally” spend it on something else.

Diversify Your Investments

With additional money in your monthly budget, you can afford to diversify your investment strategy a bit. While you may have only had enough money previously to buy fairly straightforward investments like index funds, with additional money in your savings you can branch out to include diversifying investments. These may include bonds, international stocks, commodities, private equity, real estate, collectibles or countless other options.

Don’t take this step without consulting a financial advisor, however. Simply adding other assets for the sake of diversification isn’t enough — you’ll want to select those with the proper risk/reward balance for your portfolio. 

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Start Looking Ahead to Your Future Social Security Strategy

Even if you’re decades away from claiming your Social Security benefits, whenever you increase your income, it’s a good time to take a look at the status of your future payout.

Your Social Security retirement benefits are based on the 35 highest-earning years of your career, so by earning more, you’re bumping out lesser-earning years from your work history and boosting your future payout. As your projected Social Security benefits increase, start coordinating a claiming strategy based on your future income needs and the anticipated balance you’ll expect to have in your savings and investments. 

Allow Yourself a Higher Standard of Living — but Beware Lifestyle Creep

Once you start earning money, it’s only natural to feel like treating yourself. After all, you worked hard to get that extra income, and to feel “forced” to put it all away for debt service, savings and/or investment can feel more like a penalty.

There’s nothing wrong with taking a certain percentage of your new income and using it to increase discretionary areas of your budget, such as entertainment, dining out or travel. But be sure to avoid “lifestyle creep,” which is the tendency people have of expanding their lifestyles to use up any additional income that they earn. In other words, don’t be afraid to enjoy yourself a bit more, but don’t let it come at the expense of beefing up your emergency fund, paying off your debt and tucking away more money in your retirement accounts.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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