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Her advice is really worth listening to.
Image source: Getty Images
Inflation battered U.S. consumers in 2022. That’s the bad news. The good news, though, is that employers have taken to offering up more generous raises to help compensate for higher living costs.
Late last year, consulting firm Willis Towers Watson predicted that the average U.S. raise would amount to 4.6% in 2023. That could, depending on your salary, result in quite a nice bump.
If you don’t have much or any money in your savings account to cover emergencies, then it’s a good idea to use your raise to beef up your near-term cash reserves. And if you’re still paying off a credit card balance from the holidays (or a credit card balance in general), you should use the extra money in your paychecks to knock that debt out.
But if you’re in decent shape with regard to emergency savings and you aren’t sitting on high-interest debt, then it pays to use your raise to boost your retirement savings. In fact, financial guru Suze Orman has some specific advice in this regard.
Put your raise to good use
It’s not always easy to contribute steadily to a 401(k) or IRA account. You might have more pressing needs for your money, like putting food on the table or gas in your car.
But if you’ve gotten a raise this year, Orman says you should use at least half of it to boost your retirement savings. For example, she says, if you got a 4% raise, raise your IRA or 401(k) contribution rate by 2% and keep the other 2% for bills or other expenses.
The logic here is simple. If you were managing your bills reasonably well as of late last year, and they haven’t risen in the past couple of months, then you should, in theory, be sitting on extra money by virtue of having gotten a raise. Rather than spend that entire raise on living costs, use half of it to boost your retirement savings, and then take the other half to buy yourself more financial wiggle room with day-to-day expenses.
Automate the process so you don’t miss the money
Not only is it a good idea to save at least half of your raise this year for retirement purposes, but you should also make the process easier on yourself by automating it. If you have a 401(k) plan at work, simply ask your employer to deduct more money from your paychecks to increase your savings rate. Then, when you get your paychecks, they’ll be a bit lower, but you’ll know that your 401(k) has already been funded.
If you don’t have access to a 401(k), find an IRA with an automatic transfer option, and arrange for a portion of each paycheck that comes in to land in your IRA off the bat. That way, you won’t have to think about making your monthly contributions. And when you get your remaining funds from your paycheck, you’ll know that they’re yours to spend in full.
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