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Should I Put My Raise Towards Savings or My 401K?

Reader Asks: What to Do With My Raise?

This post was shared by reader teaissogood in our Ask Savvy group.

So my employer gave me a raise this year for all of my good work! I am pretty excited about it but I started to wonder what should I do with it. I already live well within my old wage, so there is no reason to increase my spending. My other options are just to save the money in my savings or I could contribute it to my 401K since I don't max it out. In today's economy, I am not sure which is more important.

To read what I have to say, read on.

First of all, ask yourself these questions. Do you have any debts you need to pay off and do you have a nice emergency fund that'll pad you through unexpected events? You need to evaluate your current financial situation before making your decision. If your employer is matching your 401k, definitely try to max that, because it's pretty much like free money. The general rule for how much to put toward retirement each month is 10 percent of your pretax pay, but it really depends on your financial situation and the lifestyle you want to have after retirement. Check out this cool retirement calculator from The Motley Fool to have a better sense of how much to contribute. Keep in mind that you're not really playing around with stocks, you're going to be in it for the long haul with your 401k, so you'll be riding out all the rockiness of a stock market.

Retirement seems really far away, but the sooner you start saving for it, the better, because at the end of your long work journey, you'll be reaping greater rewards with the magic of compounding. This means the more money you put in earlier, the faster it grows. If you still have the heebie jeebies about putting money in the stock market, you can gradually increase your contribution incrementally over time, because you definitely need to feel comfortable with your investing style and time horizon is definitely a factor as well. Here's a tip: don't check your account too often, maybe limit it to once a quarter, because there's really no point of it except for satiating your curiosity.

If you're still not convinced, be sure to also check out the various interest rates of online savings accounts — there is a nice list over at savingsaccount.com. The rates are currently pretty low right now, so you may want to take that into consideration as well.

Ask anything career- or budget-related — well, almost anything — by posting your questions in the Ask Savvy group, and readers and I will weigh in to support you.

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