Millions of Americans Got a Pay Raise on Jan. 1. Here's What to Do if You're One of Them

Between soaring inflation and rising interest rates, Americans seemed unable to catch a break in 2023. However, with the new year came some welcome relief for the personal finances of many minimum wage workers, some 10 million of whom will see a pay increase in 2024. As the saying goes, "failing to plan means planning to fail."

A $7 billion impact

Early this month, minimum wage workers across the country saw an increase in their hourly rate. In 22 states, as well as 38 cities and counties, an estimated 10 million workers will see their income rise. A study by the Economic Policy Institute estimates that such rate increases will generate nearly $7 billion in additional wages for workers across the country.

One of the biggest changes will affect workers in Hawaii, who will see their hourly pay increase by $2 per hour, to $14, as a result of recent legislation in the state. Workers in other states will see a more modest increase, with their wages increasing by an inflation adjustment only. Some counties are taking aggressive steps to increase the minimum wage, such as Boulder County, Colorado, which increased its minimum wage by over $2 per hour in its march to reach a $25 minimum wage by 2030.

However, minimum wage workers in many states will see no change to their income. In fact, 20 states currently maintain the federal minimum wage of $7.25 an hour, which has not increased since 2009. Meanwhile, the purchasing power of a dollar has dropped nearly 30% over the same period. A recent proposal by Democrats would increase the federal minimum wage to $17 per hour over the next five years, including an immediate increase to $9.50 an hour.

Short-term steps

For many workers, an increase in the minimum wage offers a chance to get on better financial footing. Some Americans have been forced into debt as the cost of everything from groceries to gas has risen, and those in debt have been driven deeper by high interest rates. With extra income, workers can take important steps to get out of debt -- and stay debt free for good.

Fueled by rapid inflation and a dramatic increase in interest rates on debt, credit card balances among Americans crossed the $1 trillion mark last summer. If you're one of the millions of Americans struggling with credit card bills, extra cash can be used to gradually pay off high interest debt, and can supercharge a debt snowball strategy. Using a balance transfer credit card or negotiating a lower APR are other strategies to approach debt payoff without accumulating even more interest.

Once debt is paid off, it's vital to avoid incurring debt in the future. Building a proper emergency fund can save Americans from being forced into high-interest debt when unexpected expenses come up. Experts generally recommend accumulating between three and six months' worth of expenses in a savings account to insulate savers from emergencies.

Long-term priorities

After managing short-term financial challenges, savers should identify long-term goals and begin taking the steps necessary to reach them. For many Americans, long-term goals include purchasing a home or building a retirement nest egg. Saving extra income today can go a long way toward reaching financial wellness in the future.

As with any goal, progress is made by consistent action, so contributing even small amounts to savings every month can add up over time. When you identify a goal, make sure you're saving for it in the right way. Saving for retirement is often best done in a 401(k) or IRA (for the tax advantages), while a 529 savings account may make the most sense for building an education fund. And for other goals, a high-yield savings account can net a good return on your cash without the volatility of the stock market.

The past few years have been rough on American workers, but some relief is on the horizon for millions of those earning minimum wage. Those receiving a raise this year should prioritize short-term goals like paying down debt and building an emergency fund. After that, long-term savings for things like retirement should take the front seat. Create a savings plan for 2024, and resolve to make the most of higher earnings this year!