Probably the biggest economic news in recent years was announced 2 weeks ago and it got surprisingly little play.
According to the United States Census Bureau’s income and poverty report, the American median household income saw its largest boost in a half century last year, with incomes rising 5.2% (actually, it’s the largest recorded increase since the Census Bureau began keeping track in 1967).
Last year’s median household income jumped $2,798 to $56,516, up from an inflation-adjusted $53,718 in 2014.
Maybe the economy isn’t as bad as some folks still make it out to be. The unemployment rate has dipped from a high of 10% after the Great Recession to just 4.9% this month, and it has declined year-over-year for each of the last 6 years. Private-sector businesses have added 15.1 million jobs since early 2010, making this the longest streak of total job growth on record at 78 months and counting.
And with this recent income increase, median incomes are now just 1.6% lower (after being adjusted for inflation) than pre-economic crisis levels in 2007 and 2.4% lower than all-time highs in 1999. If 2016 sees half the boost that last year did, then median household income would actually surpass the all-time highs reached during the Clinton economic boom.
Many non-college educated Americans are struggling to gain ground in the new economy with globalism sending low-skill jobs to cheap labor locales, and I don’t want to downplay that, however, these unemotional very-real statistics paint a very different picture than the fear-mongering rhetoric we’ve all been bombarded with. There are real challenges in the global economy, and we can and should strive for higher incomes, but a little gratitude for the positives here and there doesn’t hurt either.
That said, let’s move on to the more actionable half of this article and discuss how to boost a raise by making sound decisions that will turn it into even more money.
The average personal savings rate in the U.S. is just above 5%. At levels that low, it’s easy to assume that many people could do a significant amount of positive for their personal finances by doing anything other than spending their raise on crap they don’t need. At the same time, the average U.S. household is carrying $15,310 in credit card debt, and the average retirement savings are shockingly low (and often non-existent). Smells like opportunity.
Inflation-adjusted raises are powerful, because you previously survived at a lower income level the year prior. You are reading this article, right? Hopefully, that means you’re still alive. And now you have more income to put to work. So how do you get the most out of that raise?
Assuming the mafia isn’t after your limbs, or worse, you have outstanding payday loans, this is the order of action I would suggest:
- Get your full 401K match and/or HSA matching funds: Most employer 401K matching and HSA matching comes at a high percentage rate – typically 50, 100, or even 200% of what you contribute, up to a specified dollar amount. First, get the full match in whichever account has a higher matching rate. Then move on to the other. This is a no-doubter as #1. It’s free money, folks. You’re not going to be able to legitimately find a guaranteed 50, 100, or 200% return on investment elsewhere. A $2,500 raise could turn into a $7,500 raise with a 2X match.
- Pay down credit card debt: after employer matching, this is the next highest value way that you can boost your raise. Saving money (by paying less interest) is just as good as earning it, even if you find it to be less satisfying or exciting. Credit card APR’s are typically between 15-25%, so for each dollar you wipe from your monthly balance over the course of the year, you’re essentially guaranteeing a return of whatever APR you pay on that card.
- Compare your other debts to a conservative investment return – and go with the highest return: here’s where things get a bit more personal. Take the rates you pay for various debt (i.e. mortgage, auto, student loan) and compare them to a conservative average annual investment return you could realistically achieve (i.e. 5%). Then, put money into whatever will get you the highest return. If it’s paying off debt, this refers to paying down balances above and beyond your minimum monthly payments. Check out my pay off debt or invest post for more info.