What should I do with the extra income I will be earning from a promotion?

I am 26 years old, married, and have three kids. I was recently promoted. I will now have an extra $300-$400 in income and I'm not sure what I should do with it. I have about three months of expenses saved as an emergency fund. Should I invest my extra income or put it in a savings account? I'm new to investing and not sure what I should do with a little extra income.

Co-Published on Investopedia

Co-Published on Investopedia

Congratulations on the promotion and on the wisdom to plan what you want to do with the extra income. I have three recommendations for you to consider – and doing a little of each would also be an option.

Contribute to Your Retirement

First, investigate whether your employer has a 401(k) or other retirement plan and if your employer offers a match. If they do, start by contributing at least enough money to get the full match. Your HR department should be able to help you with the calculations. Here is an example to show how a match works: Say you make $3,000 per month (before taxes) and the employer matches up to 5%. If you put $150 into your 401(k) your employer would put an extra $150 into your account. [$3,000 x 5% = $150] Basically, you just get free money for contributing to your retirement savings, so it's like a promotion on top of your promotion. As for what investment to choose, if you don't have a fiduciary and fee-only financial advisor, you should consider a target-date fund for your investment (assuming the plan has them).

Beef Up the Emergency Fund

Second, consider beefing up your emergency fund to at least six months of expenses (or even more). With three young kids, emergencies will crop up regularly such as medical visits and braces. Additionally, a job loss won't just impact you and your spouse, but will also impact your children. Having additional emergency funds at this time of life can be extremely important to the financial safety of your family.

Eliminate High-Interest Debt

Third, make sure you don't have any high-interest debt eating away at your finances. I would consider any interest rate above 5% to be high-interest in this environment (2018). If you do have any debt like this, consider allocating a portion of the raise to paying down the debt. Every dollar you pay down keeps more of your future money in your pocket, rather than going to a credit card company or other lender.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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