People forget to invest their money when their income increases, and it’s costing them way more than they realize.
Here’s what happens: You get a raise, and you’re so excited. It’s all coming together. Now you can buy that car, save more for that house and take that vacation. But wait. There’s something missing. You keep getting raises, and your life improves bit by bit, but you still seem to be in the same place you’ve always been.
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Money feels tight, and your future doesn’t seem that much different from how it looked all those raises ago. What’s happening?
You’re increasing your cost of living each time you make more money, so you end up feeling like you’re running in place. Here’s the one thing people skip when they get a raise, why it costs them later and how to avoid this mistake.
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The No. 1 Mistake: People Forget To Increase Their Investments
It’s easy to forget to invest a portion of your raise because you’ve likely been waiting for it for so long. You’ve got plans, like that house, car or fancy vacation. You might have kids to put through school, or you might be trying to go back to school yourself.
And those things are important, but what’s much more important is making sure you have an emergency fund, that you’re getting out of debt, and that your retirement goals are being met.
Why does this matter?
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You’re Losing Compound Interest
It matters because you’re losing a ton of money by not earning interest on that increase.
For every dollar you invest, you can potentially earn 12% on average on the stock market, per Ramsey Solutions. That means if you get a raise of $200 per month, and you invest half of that, you’re making an extra $12 per month, just from the first $100 invested (12% annually is about 1% monthly).
In a year, that’s $68 in interest earned. But over 30 years, that’s a whopping $311,193 in interest earned.
But even more importantly, you earn interest on the additional interest you earn. That’s what makes it compound interest. Basically, the more money you invest, the more money you make, and the more interest you earn on those higher dollar amounts.
To Avoid This: Increase Your Investments With Every Raise You Get
So, for every raise you get, take stock of your financial situation.
Yes, you should treat yourself a bit. But also live below your means, and make sure you set aside a portion of your raise to reinvest in yourself. That might mean building your emergency fund up or increasing your contribution to your 401(k) plan. But it should always mean earning interest on a higher amount of money with each raise you get.
It’s a good idea to talk to your financial advisor to make sure your money is earning the way you want it to. So every time you get a raise, schedule an appointment with your advisor and revisit your finances.
The last thing you want to do is find yourself at the end of the year wondering where all that money went.
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This article originally appeared on GOBankingRates.com: This 1 Thing Most People Skip After Getting a Raise (and Why It Costs Them)
