Increasing Savings as Your Income Increases

Let’s say you’re on track with a savings plan where you put in X amount of money monthly to reach your goal in Y amount of time. Awesome, but then one day, you receive a promotion at work. Suddenly, you have a bit more money to work with. Time to buy all those items on your wish list, right? Maybe not.

Suppose that instead of spending the additional money, you decided to increase your contributions to savings. 

This graph illustrates a simple example of how increasing the percentage of your savings contributions after a raise can have a drastic effect on how quickly you reach your goals—and still leave you with more spending money than you had before your raise.

To keep things simple, we’ll assume that you receive no other raises for 7 years. If you’re earning $35,000 a year and save 10 percent of your income each year, at the end of 7 years, you’ll have saved $24,500.

Now suppose, however, you’ve received a $5,000 raise and now earn $40,000. 

If you continue putting aside 10 percent of your income each year, at the end of 7 years, you’ll have saved $28,000. However, if you increase how much you save by only 5 percent, in 7 years, that small increase in your savings will mean that you’ll have saved $14,000 more than if you’d kept saving at 10 percent or $17,500 more than you’d have in your original plan—and that’s not even counting interest.

Managing a Windfall

In most situations, the strategies for managing a windfall like a tax refund or a settlement check are similar to the strategies for managing money in general:

Pay off debts. If you’re behind on paying the bills, take away that source of stress and repay them. You may want to tackle the higher-interest debts first so you pay less overall, but you could also go for the smallest bills first to get some personal satisfaction and free up cash flow.

Review your emergency fund. How long would it be able to support you if you came into hard times? If you’re unsure whether your safety net could handle the weight of a true emergency, now would be the perfect time to give it a little reinforcement. You’ll be glad you did.

Save and invest. How are your financial goals coming along? Help reach your goals on time by tossing some money into interest-earning accounts. Maxing out your retirement contributions is one of the smartest routes you can take thanks to the growth potential of long-term compounding.

Have some fun. If this is more than a modest windfall, don’t be afraid to spend a little on yourself. We all deserve to treat ourselves now and then.

Are Your Current Savings Vehicles Working for You?

As your needs change and your assets increase over time, you may find that your current savings vehicles aren’t cutting it anymore. By sticking with the same savings vehicles, you could be missing out on better growth and accounts that are better suited to your revised financial goals.

  • Improve your interest rates. Are your savings sitting in a standard savings account? While this can work well for an emergency fund, other money you wish to save could be moved into a money market account or certificate to provide you with higher interest rates.
  • Save and invest with accounts specific to your needs. When your money is in a savings account, money market account or certificate, it can be used for anything. However, if you have a child and want to start saving for his or her education, there may be better-suited, tax-advantaged accounts you can use, such as a 529 plan or a Coverdell education savings account.
  • Supplement savings with investments. To accomplish your financial goals, saving isn’t your only option—you’ll need to take advantage of investing vehicles as well. Look into mutual funds, exchange-traded funds and other investing vehicles for the possibility of higher returns.

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