Do you know what to do next after receiving a raise or a cash windfall? While most people know better than to immediately spend all of this money, it can be a little less clear where the money should be allocated next to help you continue building your wealth.
GOBankingRates spoke to money expert Laura D. Adams about savvy moves to make with a raise or cash windfall which can lead to you becoming rich. Plus, Adams shares how much money to keep in your savings account and tips for fun ways to keep saving your money.
What steps do you recommend people take to reassess their savings when they get a raise or other significant increase in their income?
When your income increases or you receive a cash windfall, it’s a powerful opportunity to improve your financial life. First, review your emergency savings. Recent data from Finder’s Consumer Confidence Index found 17% would only be able to live off their savings for a week or less if they lost their job tomorrow.
A good rule of thumb is to keep at least three to six months’ worth of living expenses in an FDIC-insured high-yield savings account. If you really want to be prepared, bump this amount based on your and your family’s needs.
Next, start or increase making regular contributions to tax-advantaged retirement accounts at work or on your own to simultaneously build wealth and cut taxes. Once you have a healthy cash cushion and are in the habit of investing for the future, focus on paying down your debt. Fewer liabilities can reduce money stress and help you live within your means if you tend to overspend.
How much money do you think every American should aim to have in a savings account?
How much you need in savings depends on your income, debt, family situation and financial goals.
A good plan is to maintain an emergency savings equal to at least three months’ worth of your living expenses. That would protect you from relying on debt in a hardship like losing your job or business income or having a significant, unexpected expense.
Can you suggest any unconventional methods of saving that might add an element of fun?
There are many ways to save which are unconventional and even fun.
For instance, you might set a no-spend challenge where you avoid all discretionary purchases for a period, such as a day, week or as long as you can. Or you might only spend on used items instead of purchasing new ones by going to the library, shopping online thrift stores or swapping articles with family and friends.
Jaime Catmull contributed to the reporting for this piece.
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