8 Ways To Make The Most Of A Big Raise

March 05, 2018

“I’m so tired of driving this old beat up car. As soon as I make some more money, I’m getting my dream car. I deserve it.”

“We have so outgrown this house. There just isn’t enough space for us, to entertain, or for anything really. As soon as I make some more money, I’m getting my dream house. It’s about time I get something I really want.”

“I can’t even remember the last time I had extra money to just splurge with. As soon as I get a raise, that’s the first thing I’m putting money aside for.”

Have you ever found yourself saying some version of these things to yourself? I can definitely relate — early on in my career, I often found myself daydreaming about the ways I would spend additional income.

Hitting the pause button

Depending on your line of work, big bumps in income may come along often or only rarely, but regardless, when they do, it’s easy to quickly start dreaming of a bigger home, nicer car or even just a fancier wardrobe. At the extreme, many of us think that having a higher income will make our lives easier, only to find that when we look back over the years of small increases, nothing’s really changed in the way we feel about our financial situations.

The next time you find yourself with a bump in income, before you start bookmarking properties or loading up your shopping cart, PAUSE. This is the perfect time to consider how to make the most of your new pay rate and to ultimately make sure that you never have to revisit these thoughts again.

Here are eight suggestions that may not sound very exciting, but when taken seriously, can get you to the point of NOT needing a big raise in order to have the life you want.

  1. Accelerate debt payoff – Use the Debt Blaster calculator to find out just how much sooner you can get those lingering student loans or credit cards paid off by adding a bit more to your monthly payments.
  2. Bump up your emergency fund – More income means you’d miss it more if it went away, so use this time to add to your savings BEFORE taking on more financial responsibilities (like a new car or a bigger house) that make it harder to do so.
  3. Max out your Health Savings Account (HSA) – Maybe you haven’t elected the High Deductible Health Plan (HDHP) before because you didn’t want the risk of having a big out of pocket hit, which often makes sense for situations where money is tight. Now that you make more money, the risk may be outweighed by the opportunity to save more tax-free for future expenses, like starting a family.
  4. Contribute more to your 401k – Retirement may seem way off (especially if it literally is), but saving more in your earlier years will give you more options for later years. Use the Retirement Estimator calculator as a way to gauge how even just one percent more saved at a young age could mean retiring a year or more earlier than you expect.
  5. Save for short and long-term goals in a Roth IRA – You can put an extra $5,500 into a Roth IRA for 2018, and even more if you’re 50 or older. When just starting out, a lot of people actually use a Roth IRA as savings account. Since whatever you contribute you can always take out tax-free and penalty-free, it can be a way to build up an emergency fund, while also boosting your long-term savings. Check out these 12 benefits of a Roth IRA on top of that. (By the way, you can still make a 2017 contribution to a Roth IRA by the tax filing deadline of April 17, 2018.)
  6. Purchase some stock through your Employee Stock Purchase Plan (ESPP) at work – If your employer offers an ESPP, it’s a great way to get more bang for your buck because you purchase shares of your employer’s stock at a discounted price. You can leave that money alone until retirement or some people prefer to sell right away to take the earnings from the discount, then put that money toward their next big vacation.
  7. Think bigger – Is there something really cool that you’d love to have, but always figured you could never afford, like a vacation property, or a cleaning person? Depending on how big your income jump is, and assuming you have the Big 3 (emergency fund, no high interest debt and saving enough for retirement) in place, perhaps it’s time to shift your money mindset to something you never considered a possibility before, rather that using the additional money to just upgrade to a bigger house or fancier car.
  8. But not too big — Beware of lifestyle inflation: our “needs” tend to grow as our income grows. I’m not suggesting that you continue to live like a college student, but living below your means is the key difference between most “everyday” millionaires and those who may earn the same salary, but spend every dime they have.

At the end of the day, the point is to enjoy life and a part of enjoying life is having enough money to pay the bills and save for the future while still living in the moment! You put in the hard work needed to get to this new income level. Now, make the most of it by putting some of that extra money towards living life now and making sure you are financially stable in the future.

Here’s How One Couple Is Achieving Financial Independence Before Age 50

September 08, 2017

One thing I love about working at Financial Finesse is that I have the opportunity to provide financial guidance to folks with a wide range of needs. The majority of my conversations are centered around the specific needs of an individual at a specific point in time — it gives my days a huge variety and I find that every conversation I have is unique.

However, I was recently reminded that while each person and their needs and goals are unique, many of us are in the same situation. It’s how we approach that situation is what leads to differing needs, goals and outcomes. Here’s what I mean.

The situation

I recently spoke with Craig (not his real name), who was looking at ways for he and his wife to maximize retirement plan contributions. Their goal was to save 50% of their income and to be financially independent in the next 5 to 10 years. He is 37 years old now. After assessing his situation, I agreed that they would actually be able to achieve that goal and be completely financially independent before the age of 50. Amazing!

As our conversation concluded, I found myself thinking about how this guy and his wife are doing things right but was also telling myself that their situation is unique and that they are lucky — they both have good paying jobs and could afford to sock away a good chunk of change to meet their goals.

But as I gave it more thought, I realized that their situation was not at all unique. Like may of us, they both went to school, got jobs that paid them fairly, eat 3 meals a day, live in a home and community they enjoy, etc. They weren’t born into money, they were working to accumulate their own savings. What is unique about this couple are their financial goals which translate to different than the “norm” habits and outcomes. So, what can we all learn from their success?

Learning from their success

Decide What Is Important To You. It’s all about prioritization. Craig’s top priority is to save early and often to achieve financial independence at an early age. My guess is, he’s not concerned about keeping up with the Jones’s, nor does he drive a luxury car.

I think you will agree that Craig has probably taken this decision to a bit of an extreme (not everyone can achieve financial independence by their mid 40’s), but we can all set realistic long term goals and adjust our spending and lifestyle behaviors to achieve these goals.

Making a small shift: Set a goal to retire one year earlier than originally planned. Then, cut out something that’s not as important to you as retiring earlier and apply the savings towards retirement.

Plan Early And Often. Rome was not built in a day. When I talked with Craig, it was clear he had been working consistently towards meeting his goal for a long time. My bet is that virtually every financial decision he’s made since his early 20’s has been influenced by his long-term goal. Again, he may be taking this to an extreme, but if you have a long-term vision, set the goal and work to achieve it, you may surprise yourself on what you can accomplish.

Making a small shift: Answer this question: what do you want to be different in your life 10 years from now? What small action can you take today to take a step toward that change?

Live Below Your Means. Craig and his wife most certainly live in a smaller home than they could afford to buy based on their income. If the bank says you can afford a $350,000 mortgage, that does not necessarily mean it would be a good financial decision for you. Consider what that larger mortgage payment would do to your day to day life style.

Look at it this way, if you had chosen a lower-priced home and reduced your 30-year mortgage payment by $100 per month, and instead directed that $100 to your 401(k) over the 30 years of your mortgage, you would have increased your retirement savings by $100,000 (assuming an annual return on 6%).  That’s real money that could allow you to achieve your financial independence sooner that you think!

Making a small shift: Maybe you can’t move to a home that’s $100 less per month or maybe you don’t have 30 years to save, but what other areas can you cut back so that you can find an extra $100? Use this calculator to see the impact of finding just an extra $3 per day to put away.

The key takeaway from Craig’s story is that if achieving financial independence is THE most important thing to you, it’s entirely possible. You just have to be willing to make some tough choices in order to get there.

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7 Steps To Your Financial Independence Day

July 04, 2017

Happy 4th of July! To honor the theme of independence, I’d like to share an oldie but goodie, written by my colleague, Greg Ward, updated for 2017. Enjoy and have a safe celebration.

To honor our nation’s birthday, why not declare your own personal “Financial” Independence Day? To me, financial independence equates to not having to worry about money, so if you are worried about your finances, take these seven steps to economic freedom:

Step 1 – Establish an emergency fund

Failing to set aside money for an economic emergency or a rainy day is a sure way to get you in trouble if and when the rain comes. Arm yourself against such things by putting aside six to twelve months of expenses in a safe, liquid account such as a savings account or a money market fund.  You won’t make a lot, but you’ll have something to help you weather the storm.  A well-funded emergency fund is the first step to a worry-free financial life.

Step 2 – Pay off high-interest debt

Borrowing money at a high interest rate is a form of voluntary slavery. Emancipate yourself by committing extra payments to the debt with the highest interest rate. Once that’s paid off, use the newly freed money to make an even bigger payment on the debt with the next highest rate, and continue this process until all high-interest debt has been wiped away. If you are truly averse to debt, you can continue the process until your low-interest debt, such as your mortgage, is paid off too. Not owing ANYONE money may be the ultimate form of economic freedom.  See how a little extra payment can go a long way toward paying off debt with our DebtBlaster calculator.

Step 3 – Save more for retirement

According to our research, over 90% of employees are saving for retirement, but less than 30% are confident in their ability to achieve their retirement goals. Take the worry out of retirement by running a retirement projection, and applying any recommended changes. For many, it’s simply a matter of socking away more. For others, it may mean working a few more years, or investing a little more aggressively. Whatever you do, don’t rely solely on your employer or the government. Financial independence comes from self reliance.

Step 4 – Manage your income taxes

Don’t let fear of the tax man cause you undue worry. In the spirit of the Boston Tea Party, say no to higher taxes by contributing to tax-deferred accounts like a traditional 401(k), IRA or even your HSA. You can avoid income taxes in the future by contributing to a Roth retirement account today, or save for specific expenses completely tax free by contributing to a flexible spending account or health savings account. There’s nothing wrong with paying your fair share, but that doesn’t mean you have to give Uncle Sam an interest-free loan every year, which is exactly what you are doing if you receive a large tax refund every year. Take back what’s yours by adjusting your tax withholding so that you pay what you owe while keeping what you deserve.  Knowing you WON’T owe the IRS money is another step toward financial freedom. The IRS has a nifty withholding calculator you can use to estimate the appropriate number of allowances to claim on your W-4 tax withholding form.

Step 5 – Invest in and out of the U.S.

America may be the land of the free and the home of the brave, but it only represents about half of the world’s economy, so make sure to diversify your investment portfolio so that it includes both foreign and domestic holdings. Complement your U.S. stocks and bonds with international stocks and bonds, and don’t overlook investing in emerging markets (as long as you have the tolerance for the volatility, that is). Round out your portfolio with a decent level of exposure to real assets such as commodities and real estate. That way, when you read about the economic problems in Europe and the U.S., or about the possibility of higher interest rates or rising inflation, you can take comfort in knowing you have exposure to assets that may actually perform well in these types of environments.

Step 6 – Have adequate insurance

No one ever expects to get into a car accident, become disabled, end up in a long-term care facility, or die young, but the reality is that such things will happen, and being without adequate insurance is a sure way of putting you and your loved ones in a financial mess. Maintain your financial independence by insuring against such risks. A well developed insurance plan offers peace of mind, so review your coverage periodically to ensure you are prepared for whatever life throws your way. A good insurance agent can help you understand the risks, and make sure you are adequately protected.

Step 7 – Have an estate plan

You’re working hard to achieve the American Dream, don’t lose it for lack of planning. Learn how to maximize wealth transfers by utilizing tax credits and exemptions. You can also minimize estate taxes and probate fees through proper asset titling and the use of trusts. Your estate plan should include a will, a financial and healthcare power of attorney, and a healthcare directive (also called a living will). Without an estate plan, you may have to rely on the government to decide who gets your stuff when you pass on. A good estate plan allows you to control your assets “beyond the grave,” thus preserving your financial independence. There are a number of websites that provide access to inexpensive estate planning documents, including www.nolo.com and www.legalzoom.com.

Our country was founded on the principles of life, liberty, and the pursuit of happiness. I don’t know about you, but for me, happiness comes from knowing I’ve done all I can to protect me and my family from financial hardship. If you wish to live financially independent as I do now, take these steps, and choose to live financially free! There’s nothing more patriotic than that.

4 Things An Actuary Can Teach Us About Money

February 08, 2016

In a post last week about how choosing the right life partner can be the most financially wise choice you ever make, I wrote about how my husband Steve is my financial inspiration. He truly is a “financial hero,” who’s made wise choices about money his entire life. I am continually impressed by his natural talents as a money manager. I came to my financial beliefs and behaviors the hard way, learning from missteps I made in my 20’s…not Steve. He was born this way – a sensible, long term, evidence-based investor.  Continue reading “4 Things An Actuary Can Teach Us About Money”

Can Your Friends Help You Become Financially Independent?

January 11, 2016

Can your friends help you become financially independent? Yes — if you choose the right friends. My fellow planner, Kelley Long, recently wrote a thought-provoking post about how financial frenemies can sabotage your financial wellness. “Much like starting a new diet or fitness program has a higher chance for success if you do it with a friend,” she wrote, “engaging your friends in financial habit changes could greatly increase the likelihood you’ll stick to it.” I couldn’t agree more. Continue reading “Can Your Friends Help You Become Financially Independent?”

My Declaration of Financial Independence

December 07, 2015

As I take over Financial Wellness@Work on Mondays (following in the very big shoes of Dr. Scott Spann, who is bringing Financial Finesse wisdom to the retirement planning pages of About.com), I thought I’d take some time upfront to tell you my story so you know my perspective. Twenty years ago, I declared financial independence. I remember my Financial Independence Day very clearly… Continue reading “My Declaration of Financial Independence”

A Few Last Words

November 30, 2015

It’s amazing how fast time flies but today marks my final appearance as a weekly blog contributor for Financial Finesse and you will have a new voice who will communicate her passion about financial wellness topics. I’ll still be here at Financial Finesse doing that financial wellness thing that I do along with conducting some research and continuing education for other CERTIFIED FINANCIAL PLANNER™ professionals. I will also occasionally make some guest appearances here on the Financial Wellness@Work blog, but you can still follow my Forbes contributions and my new role as the retirement planning expert writer for About.com. I may even be able to complete writing another book tentatively titled Live, Plan, Thrive by the end of 2016. Continue reading “A Few Last Words”

Should You Plan For Retirement Or Seek Financial Independence?

July 13, 2015

When our team of financial planners asks others about their top financial concerns and priorities there is a consistent answer – retirement. In fact, our financial wellness reports usually show that every age group with the exception of those under 30 indicate that their top financial planning priority is indeed retirement planning. This probably comes as no surprise because everywhere you look these days financial services companies are bombarding us with clever messages to shift our focus to retirement. The Financial Finesse blog team, which I am a contributing member of, frequently writes about different aspects of the retirement planning process as well. Continue reading “Should You Plan For Retirement Or Seek Financial Independence?”

Continue Celebrating Freedom All Year Long

July 06, 2015

I have fond memories of Independence Day weekend dating back to my early childhood days. Our traditional family vacation spot was always the Emerald Coast on the Florida panhandle right in the heart of what some affectionately refer to as the “Redneck Riviera.” I’ve always felt the gravitational forces pulling me towards the coast and as a result, the “married with children” version of my immediately family also likes to head to the coast to celebrate our nation’s birthday. Continue reading “Continue Celebrating Freedom All Year Long”

The Non-Planner Perspective

May 15, 2015

I began paying rent when I was about 21 years old while living with a roommate. I was making pretty good money for my age and a couple of years later, decided it was time for my own space. Of course, with that, came more financial responsibility. Continue reading “The Non-Planner Perspective”

How to Say “No” to Your Boss

August 29, 2013

Unless you’ve been living on a deserted island, you’ve probably heard about the exploits of my now former mayor, Bob Filner. The most notorious were the allegations by numerous women  of various forms of inappropriate flirting, sexual harassment and possibly even assault. Less provocative, but also quite disturbing, were reports of improper demands for financial concessions from developers and the misuse of a city credit card for personal expenses. Continue reading “How to Say “No” to Your Boss”

Is Your Work Really Fulfilling?

September 19, 2012

Saving money isn’t easy, and every now and then I need to remind myself why I do it.   I watched the national political conventions a few weeks ago and heard a lot of speakers talk about the “dignity” you feel from having a job as though the mere act of doing work provides personal fulfillment.   I am deeply sympathetic to the millions of American struggling to find work in order to pay bills and to those who need every dollar they earn just to make ends meet. At the same time however, almost every day I meet people who tell me how much they don’t like their job or don’t like going to work.  I find no dignity, only profound sadness, in thinking that most people will probably spend day in, day out, for most of their lives doing something they really dislike, dreaming instead about doing something else. Continue reading “Is Your Work Really Fulfilling?”

The Importance of Being Financially Independent

June 13, 2012

I received a helpline call last week that reminded me of why it is so important for all of us to be financially independent. I’m not talking about having so much money that you can do whatever you want, but rather being in a position to manage your own financial affairs if and when the need should arise. Continue reading “The Importance of Being Financially Independent”

Learning to Become an Extreme Saver – Part 1

April 12, 2012

We’ve all heard about the many benefits of saving money.  With money in the bank, you can pay for things you need or want without going into debt.  You have an emergency fund to help tide you over in case you lose your job and you have the foundation for a nest egg that can be invested conservatively and grow over time into a substantial amount saved for retirement.  There’s no question that being a saver has several advantages.  But have you ever thought about the advantages of becoming an ‘extreme saver’? Continue reading “Learning to Become an Extreme Saver – Part 1”

7 Gifts That Can Keep on Giving

December 08, 2011

Rather than give away more fish this holiday season, why not teach them how to fish with a gift of financial education? After all, New Year’s is coming up and better money management is one of the most common resolutions. (A gift about losing weight may not go over so well.) While unfortunately you can’t exactly buy our services as a gift for someone, here are 7 personal finance books that I’ve found to be particularly insightful: Continue reading “7 Gifts That Can Keep on Giving”

More is ALWAYS Better…(or is it?)

November 05, 2010

I saw the movie “Supersize Me” recently.  (Yeah, it’s been out a long time and I’m just now getting around to it!  But I HAVE seen every Disney and Pixar movie made in the last 10 years.)  One part of the message that I heard in the movie was that “We’re Americans! Bigger is better!!!”

The “bigger is better” mentality permeates our society, and excess is often rewarded.   Just look at any Red Carpet event and the attention heaped on celebrities for proof.  But, can this culture of excess be a bad thing financially?  I think so. Continue reading “More is ALWAYS Better…(or is it?)”