For many of us, the start of a new year means more than just a bunch of looming resolutions; it means more money. In fact, recent data indicates that U.S. employees across the board will be celebrating salary increases in 2016, to the tune of 2.7 percent or possibly more. But before you take that raise of yours and use it to upgrade to a larger living space, update your cellphone or treat yourself to a brand-new wardrobe, here’s another tactic to consider: Pretend that raise doesn’t exist.
Of course, this doesn’t mean you ought to take that extra money and throw it away. Instead, you should trick your brain into thinking it’s not there and arrange for it to land somewhere it can be put to better use. Here are some options that will serve you well for the long haul:
Your Retirement Account
If you have extra money coming your way, one of the best things you can do with it is allocate it toward retirement. According to Fidelity, by age 30, you should aim to have saved the equivalent of your salary in a retirement account. By 35, you should have twice your salary stored away. If you’ve got some catching up to do, now’s the perfect opportunity to take advantage of a raise. Best of all, if your employer offers a 401(K) matching program, putting that extra money in could translate into additional free money from your company.
Your Emergency Fund
Pretty much every financial expert agrees that it’s important to have an emergency fund for situations like job loss or unforeseen medical expenses. Most advise putting aside enough money to cover three to six months’ worth of expenses. If your emergency savings is lacking, here’s your chance to pad that account by taking whatever extra money is coming your way and sticking it in the bank. You can even set up an automatic savings plan so that you don’t need to remember to transfer that money month after month. Incidentally, this will also help you avoid the temptation to spend that money on frivolous things you want but don’t actually need.
Your “Let’s Pay off These Student Loans” Fund
Are you among the many college grads still carrying a wad of student loans? One of the smartest things you can do with your raise is use the extra money to pay down your debt. Remember, the sooner you pay off your loans, the less they’ll end up costing you, as you’ll eliminate some of those pesky interest charges by lowering your principal more quickly.
Your Down Payment
Whether it’s a car or a house you’re saving to buy, coming up with that down payment can be a major challenge. If you’re getting a salary increase this year, use it to save for major life milestones like purchasing a vehicle or becoming a homeowner. Even if you’re only looking at a few extra thousand dollars, you’d be amazed at how much every little bit helps.
You work hard for your money, and it’s natural to be tempted to spend it on things that offer instant gratification. But before you do, think about your future and whether you’re on track to meet your long-term goals. Yes, it might be nice to have a larger apartment, or a new TV, but in the grand scheme of things, attaining financial security is far more important. And while you may lose out on the fun factor by going the responsible route, there’s something to be said about buying yourself a gift that truly keeps on giving: financial peace of mind.