Reduce the Interest on Your Debt and Increase Your Savings

Imagine walking into your workplace next week and hearing your boss say, “Here’s a raise!” You’d probably be thrilled.

If the raise scenario is unlikely to play out soon, don’t worry — you can still give yourself a raise. There are two areas where you may be able to save yourself money and give yourself a much-deserved raise for 2016.

One of the first and easiest ways to start increasing your own cash flow — and savings — is by taking a hard look at your debt. Although there’s no magic wand that will instantly eliminate all your student loans or credit card debt today (or even this year), there are smart ways to reduce the amount of interest you are paying on the debt.

Lower the Interest
It’s important to understand that every point you can shave off your existing interest rate is a form of “return” back to yourself. For example, if your interest rate is 7.5 percent but you find a way to refinance the debt to five percent, you will have earned yourself a 2.5 percent return on your money.

This should be step number one in giving yourself a raise: Look at all the rates you’re paying on student loans or credit cards. Can you refinance or consolidate debt to save yourself money? Now is the time to compare your options and make phone calls, since 2016 is expected to bring higher interest rates.

Ratchet Up Your 401(k)
Now, let’s make your “raise” even bigger. Where you can find more savings?

Your regular 401(k) is a great vehicle for increasing automatic savings in a way that won’t leave you feeling deprived. Not only will you improve your investment savings balance, but you’ll also lower your tax burden. If you’re earning $100,000 a year, for example, a one percent savings increase in your 401(k) would mean an extra $1,000 per year, or $80 a month. That’s just $20 a week, or two deli lunches. Find a way to save more that would be relatively painless, such as brown-bagging your lunch twice a week, or brewing your coffee at home and putting it in a travel mug.

While it might feel like the opposite of a raise in the short term — your paycheck will be a shade smaller from the increased payroll deduction to your 401(k) — you’re winning in multiple ways. Not only are you reducing your taxable income by $1,000, but you’re also effectively saving 100 percent on every dollar rather than 75 cents on the dollar, assuming your income tax rate is 25 percent. This money can grow tax-free over time, and every dollar invested today could be worth $10 in 30 years (on average) thanks to compound interest.

Sure, it’s nice to get an official raise at work (and don’t wait for one…go ask for one!), but taking care of your finances so the money you do make will work harder for you is another way to “raise” your financial life.

Catherine New is a member of the DailyWorth Connect program. Read more about the program here.

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