Experiencing a Sudden Increase in Income? 12 Things to Do Immediately

Making more mon ey than you’re used to through a raise, a new job, a bonus, or some other incentive is one of those “problems” more people would surely like to have. Yet, a sudden increase in income can cause issues that can set you back financially.

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From overspending to not investing properly, a sudden increase in income can take some adjusting to. Financial experts offer some tips on how to make sure you do so in a way that sets you up for financial success.

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Create or Update Your Budget

It’s easy to overlook the basics in financial planning because you think you have things handled. However, budget basics are always essential to good financial health. Bill Ryze, a certified Chartered Financial Consultant with Fiona.com , recommended you adjust your budget to incorporate your additional income.

“Allocate funds towards savings, investments, and necessary expenses,” Ryze said. “I advise using budgeting tools or apps to monitor spending and ensure you live within your means.”

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Start or Increase Your Emergency Fund

You might be making more money now, but there’s no guarantee into the future. This is the perfect time to increase your emergency fund, Ryze said, or start one if you don’t have one.

“You must have at least three to six months’ worth of living expenses as your emergency fund. I suggest directing a portion of your increased income towards bolstering your emergency fund.”

Boost Your Savings Rate

Another way to look at this is to boost your savings rate, according to Abid Salahi, cofounder of Finly Wealth .

“This move capitalizes on the income increase while maintaining financial discipline,” Salahi said. “I recommend allocating at least 50% of the rise to savings or investments. For instance, if you receive a $20,000 annual raise, aim to save or invest at least $10,000 of that additional income.”

Pay Down High-Interest Debt

If you’ve been carrying high-interest debt you’ve struggled to pay off, such as credit cards or personal loans, an increase in income is a great time to get ahead of that.

“I recommend using methods like avalanche (paying off higher interest first) or snowball (paying off smallest balances first) to reduce debt efficiently,” Ryze said.

Maximize Retirement Contributions

A jump in your income presents the ideal opportunity to secure your future, as well, Ryze suggested.

“You can increase your 401(k) contributions or other employer-sponsored retirement plans. One of the best options is contributing to an IRA or Roth IRA for additional retirement savings.”

Consider Other Tax-Advantaged Accounts

If you are eligible , Ryze recommended you should also contribute to other tax advantaged accounts, such as an HSA (Health Savings Account) for medical expenses, or an FSA  (Flexible Spending Account) for healthcare or dependent care expenses.

Invest In A Diversified Portfolio

If you are investing or planning to, remember the golden rule of investing, Ryze said, “Do not put all your eggs in the same basket.”

Salahi agreed, adding, “With a sudden income increase, you have the chance to spread your investments across various asset classes. This not only helps manage risk but also positions you to capture growth in different market sectors. I’ve had clients who used their income boost to start investing in real estate investment trusts (REITs) or peer-to-peer lending platforms, which provided them with new income streams and accelerated their path to financial independence.”

Save for Future Goals

If you haven’t already, a boost in income can also offer you the chance to save for the future, whether that’s in a 529 plan for your children’s education, or a home, car, or vacation, Ryze said.

Review and Adjust Insurance Coverage

Your health should be a primary concern, too, even if you’re young and healthy-that’s a great time to invest in things like long term care plans, annuities and other insurance that can protect you when you’re older, have a medical crisis, or in general to safeguard your family’s future if you’re the breadwinner, Ryze said.

Continue Education and Develop Additional Skills

One income boost is great-but maybe you can even get another through developing more skills, both Ryze and Salahi said.

“One of the best returns on investment you can get is from investing in yourself. Whether it’s taking a course to enhance your professional skills, hiring a coach to improve your leadership abilities, or starting a side hustle, these investments in yourself can pay dividends for years to come,” Salahi explained.

He said he’s seen clients turn a $5,000 investment in a professional certification into a $30,000 annual income increase within just a couple of years.

Charitable Giving

If you have all your own financial needs taken care of, Ryze said, “Remember the saying, ‘Charity begins at home.’ You should consider setting aside a portion of your income for charitable donations. It can also help you with tax benefits.”

Create a Financial Plan

Lastly, Salahi emphasized the importance of creating or updating a comprehensive financial plan. “A sudden income increase is the perfect time to reassess your financial goals and create a roadmap to achieve them.”

“With a significant income increase, you have the opportunity to accelerate your journey towards your financial goals,” Salahi said.

Whether it’s early retirement, buying a home, or starting a business, a well-crafted financial plan helps you align your newfound resources with your long-term objectives, he said. “I’ve had clients who, upon receiving a substantial bonus, used it as a catalyst to create a 10-year financial plan that put them on track to retire a decade earlier than they originally thought possible.”

Mainly, if you can avoid lifestyle creep, and prioritize saving, investing and paying down debt, you may just see the fruits of your income boost for years to come.

This article originally appeared on GOBankingRates.com : Experiencing a Sudden Increase in Income? 12 Things to Do Immediately