Good News. According to a November survey from the think tank the Conference Board, companies are setting aside 3.9% of their payroll budgets to raises in 2022, a record high not seen in a decade. Congratulations, you worked hard for it, and you deserve it. It can be easy to put that additional income right back to work in the economy by splurging on something big, fun, or exciting. Or you can turn good news into a better plan.
Of course, you should reward yourself, but giving a little thought to ways you can put the money to work for your future is a good idea, too. Your future self will thank you.
Increase Your Tax-Advantaged Savings
One impact of the recent inflation is that the maximum contribution amounts to various accounts. 401(k)’s and other employer-sponsored retirement accounts got a boost for 2022. The amount increased by $1,000 to a maximum contribution of $20,500 if you’re under 50. The 50+ catch-up contribution did not increase, but the new total is now $27,500.
Tax-deferred retirement savings plans are a great way to put away money for retirement and save on your taxes in the year you contribute. If your pay increase or bonus was enough to bump you into a higher tax bracket, putting some of the additional income into a traditional retirement plan may be enough to lower you back down.
If you have a high-deductible health plan, opening a Health Savings Account is a great way to save for retirement healthcare expenses. If used appropriately, the health savings account can offer a trifecta of benefits. The funds are contributed pre-tax and grow tax-free, and there are no taxes on the withdrawal if distributions are spent on qualified expenses. The maximum contribution is $3,650 for an individual and $7,300 for a family for 2022. The health savings account has a $1,000 catch-up provision for those over 55.
Pay Down “Bad” Debt”
Not all debt is necessarily a financial negative. With interest rates currently low, you may want to keep a mortgage or other low-interest debt. However, if you have money outstanding on high interest or variable debt, it may be a good idea to pay it off or move to a fixed interest rate. There are three benefits to paying down a credit card or other high-interest debt:
- It can save a substantial amount of money on interest payments. Savings in one area means a surplus of cash for something else.
- Keeping credit card debt lower than 30% of the total credit line of the card keeps your credit score healthy. A good credit score can not only save you money when shopping for loans, such as auto and home mortgages, but it can also lower some expenses like homeowners’ insurance.
- Interest rates are poised to go up. Any credit line with a variable interest rate will likely increase with interest rates. Paying off debt now will avoid any expensive surprises – because who reads those notices from the credit card company?
Revisit Your Emergency and Other Savings Goals
If you have an emergency fund, you're ahead of the game. Since your income has gone up, you should revisit your emergency savings. The impacts from COVID-19 have enforced the need to plan for the unexpected. Is your emergency savings up to par? Can it cover your emergency and prevent you from making investment mistakes?
If you are saving for something else within the next couple of years? We suggest funds for short-term goals are held within your cash reserve and are not subject to investment risk. The more you stash away for your goal, the faster you'll get the reward and satisfaction of achieving your short-term goals.
I'm not going to advocate for all work and no play. Not only because I would have a hard time convincing you but also because balance provides benefits. While saving for retirement and long-term goals are important, it is equally important to reward yourself. You can both be responsible and commit to reaching your longer terms goals and take a portion to help motivate you to keep going forward. In fact, a good financial plan incorporates how to live for today yet plan for tomorrow.
The Bottom Line
Your financial journey shouldn't be one long, drawn-out agonizing slog to retirement. Keeping everything in balance and making sure you are on track is our passion. We will even help make sure you get to enjoy the fun stuff along the way!
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.