Should You Put Your Raise into Your Retirement Account?

You got a raise — congratulations! It’s easy to think of a raise as extra money and to use that boost in income to take the strain off your monthly budget or to buy some small luxuries. But that might not be the best financial decision in the long run. Here are some questions to ask yourself when you’re deciding what to do when you get a raise.

Are You Struggling to Make Ends Meet?

Even though you may want to save more for retirement, now might not be the time. If you’re barely making it through the month with the money you have now and your expenses are as low as they can be, it might be better financially — and emotionally — for you to spend the money now instead of saving it for the future.

Do You Have Debt?

If you’re paying interest on loans or credit cards, you may want to use your extra money to reduce your debt instead of adding to your retirement account. The higher the interest rate you’re paying on your debt, the more it makes sense to reduce that expense first. Once your debt is lower or gone, you can take the money you were paying toward it and add it to your retirement account. 

Does Your Company Match Your Contribution?

Your employer might match some or all of the money you contribute to your 401(k) account. This contribution is essentially “free money,” so it may make sense to increase your own contribution at least to the level that you get your company match.

For example, suppose you make $50,000 a year and your company match is 50% of your contributions up to 6% of your salary. If your raise makes it possible for you to put 6% of your salary ($3,000) in your retirement account, your company will also contribute $1,500. 

You’ll want to look into the details of your employer’s plan. The percent match or total amount companies contribute can vary.

Can You Contribute a Little Bit?

You might not be able to put your whole raise into your retirement account, but can you increase it a little? Even adding 1% to your contribution may increase your balance at retirement by a lot. And that 1% might only reduce your paycheck by $10 to $20 a week, depending on your income.

How Old Are You?

Increasing your retirement savings can make sense at any age. It can be a great idea if you’re younger, because you have decades ahead of you for your investment to grow. And you might not have expenses like a mortgage or childcare that could make contributing tougher in the future.

It’s also smart to save more if you’re older, for the opposite reason — you don’t have as many years left before retirement. If you’re not on track, it makes sense to save as much as you can.

How Much Are You Already Saving?

If you’re a solid saver, you might already be hitting the maximum you can contribute to your retirement savings account. As of 2024, you can contribute $23,000 if you’re under 50 years old and $30,500 if you’re age 50 or older. Each year, the IRS publishes maximum contribution numbers, so be sure to keep up with any changes that may impact you. 

In that case, you may want to consider other ways to invest your raise. You have lots of options. Two to consider are a health savings account (HSA) if you have a high-deductible health plan, or an individual retirement account (IRA) if you want a way to save more for retirement outside of your employer’s account.

A Professional Can Help You Find the Right Path

Whether it’s a raise, an inheritance or income from a side hustle, if you’re asking yourself, “What do I do with extra money?” a professional can help. Farm Bureau Financial Services can look at your income and expenses, take into account your goals and recommend a path that can help you meet them. Reach out to a Farm Bureau financial advisor today for personalized advice.