You just got a raise! Now what?
Posted September 27
Congratulations all around! You’ve just earned a big promotion, which means a significant boost in your salary.
What to do next? Refurnish the house? Text the Tesla dealer about that sleek new ride that you’ve been yearning for?
Anything but. Not only may a promotion mean greater professional responsibility, so, too, does it mean greater financial responsibility — to yourself and your loved ones.
Hold off on the shopping spree until you consider these important issues first.
No matter the size of the raise in salary associated with the promotion, all that money isn’t going to end up in your pocket. Step one is gaining a more realistic picture.
“You may be surprised by how much of your raise goes to taxes and other withholdings," said Salt Lake City financial adviser Brad Thurber. “Calculate how much your paycheck will truly increase, take your annual raise and divide by your number of pay periods and then subtract out the amount that will go to taxes and 401(k) to determine how much will actually end up in your bank account.”
From there, take the time to go over both your short- and long-term goals in light of whatever additional cash flow you’ve calculated.
“Analyze your current expenses, including your fixed monthly bills, discretionary spending and the money you allocate toward investments,” said Thurber. “Are there any expenses you could reduce? Any investments you should be adding to? Where will your raise do the most good?”
Evaluate retirement status
One of the greatest opportunities afforded by a salary increase is to boost your retirement savings. That becomes all the more critical if retirement has been on the back burner to this point.
“If you aren't paying in to your employer's 401(k) program, sign up ASAP,” said Timothy Wiedman, a retired professor of management and human resources at Doane University. “And if your employer provides a match of some sort, make sufficient contributions to get all of the matching funds available — or at least, all that you can possibly afford. Leaving matching funds on the table is a huge mistake.”
Additionally, if you don’t have one in place or have only been able to earmark a small amount, look into adding some muscle to an emergency fund. This, which experts say should range between three and six month’s living expenses, should be sheltered in a safe vehicle, such as a money market fund or savings account, where it can be readily accessed as necessary.
Lastly, pay down significant debt, particularly consumer debt such as credit cards — those with the highest interest rates first. Alternatively, paying off smaller balances can boost the feeling that you’re making measurable progress.
One mistake many people with newly earned levels of income make is rushing into decisions that they later wish they had given greater thought to. Learn from their misstep. Let the circumstances of your new salary sink in a bit before committing the funds to any one goal or objective, no matter how worthwhile.
“The best thing that someone can do immediately after receiving a promotion and a raise is to ignore it,” said personal finance journalist Hank Coleman. “You should save a portion of your new raise and continue living off of your current salary.”
In particular, noted Coleman, a salary increase — especially a substantial one — can prompt even the most responsible person to spend money in a way that may not be sustainable over time. To offset that, consider setting up automatic transfers of funds to accounts out of the reach of daily spending.
“A raise from a promotion is like found money, and you should avoid lifestyle creep,” he said. “Then you can use that money for other financial goals like increasing your investing for retirement, paying down debt or saving for your children's college.”
On the other hand, there’s no reason to come off as a totally selfless miser. Within reason, earmark some funds to treat yourself for a job well done.
“Maybe it’s as simple as going out to dinner; maybe it’s something more significant like a family vacation. Depending on the size of your raise and its impact on your budget, find a fun way to celebrate,” said Thurber. “You’ve worked hard and earned that raise; you should enjoy it. Just make sure that raise also works hard for you.”
Jeff Wuorio lives in Southern Maine, where he covers personal finance and entrepreneurship. He may be reached at email@example.com, and his website is at jeffwuorio.com.