If you’ve recently received a salary bump, congratulations! An increasing salary is one of the keys to long-term financial success. But what you do with that extra income plays an important role as well.
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You have three basic choices on how you can use any extra money in your paycheck: invest it, save it, or spend it.
Here’s a breakdown of the pros and cons of investing, saving or spending your salary increase.
Investing means using money to buy an asset in the anticipation that it will generate income and/or an increase in value over time. If you’re looking to build wealth, investing is your best option.
The S&P 500 stock market index, for example, has a long-term average return of about 10% per year. Thanks to the power of compound interest, that’s enough to double your money every seven years or so.
One trick many financial advisors recommend for building long-term wealth is to invest any “found” money. This includes any type of money that’s not part of your monthly budget. Typical examples include tax refunds and bonus checks, but salary increases qualify as well. Since you were already (hopefully) spending less than you earn, it means that you should be able to get by without spending the salary increase.
If you’re looking to boost your long-term nest egg, investing is the best choice. Savings accounts can’t keep up with the return of the stock market, and spending subtracts from wealth, rather than building it.
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Boosts long-term wealth without having to go “out of pocket”
Multiplies the value of the salary increase thanks to compound interest
Prevents cash from being spent
While long-term investing can net the highest returns, sometimes the best place to put a salary increase is in a savings account.
When your money is in a savings account, it’s instantly accessible via a debit and/or ATM card, giving peace of mind in case you have any financial emergencies. It’s also federally insured by the FDIC for up to $250,000.
Thanks to the explosive growth in online, high-yield savings accounts, you can likely find plenty of suitable options for your money. Most competitors in the space offer insured accounts with no fees or minimums that pay 10x or more in interest as traditional brick-and-mortar bank accounts.
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