Wondering what to do when you get a big raise?
As we approach the end of the year, many people are getting ready for holiday shopping. They’re also getting ready to get called into the boss’s office to hear how much more they’ll make next year. Getting the name and fame for a year because of your sheer hard work is a refreshing feeling, and a good employer will make sure people stick around by enticing them with big raises. Unless you’re getting a big promotion, chances are the raise won’t mean too much change in your standard of living, but how do you manage changes to your finances?
We’ll give you some guidance about responding when you get your raise.
Stick to Your Financial Plan
The initial reaction to what to do when you get a big raise might be that it’s simply more money for you to spend on stuff or vacations. We’ll explain why this is not the best idea, but you need to plan your finances to avoid problems.
When you first create a financial plan, hopefully, you have plenty of guidance on ticking all of the boxes. Short-term savings, long-term savings, and retirement are still crucial even when you’re making more money.
The financial plan is almost entirely dependent on your income. When you get a raise, you can prioritize some things over others, but when your income changes, so should all of the other numbers in your plan.
If you’re not sure how to start a financial plan, online resources like National Resource Connect can help you put in gear.
Break Out The Calculator
You don’t have to break out a calculator, but it would certainly help for this step. You want to calculate the percentage that your income increased in terms of net monthly income.
Remember that if you got a 3% raise, it doesn’t necessarily mean that your monthly take-home pay increased 3% as well. That’s the perfect answer to what to do when you get a big raise.
Once you’ve calculated that, you will have a straightforward way to determine how much your monthly savings distributions should increase. If you want to make it simple, you can improve all of your contributions to cash savings and retirement accounts by the percentage your pay increased.
Your retirement savings are the absolute priority. To make it simple and streamlined, retirement savings should always follow a set percentage of your take-home pay.
If you want to put more or less money into your other accounts, you can certainly make changes depending on your goals.
Make Sure You’re Not in the Next Tax Bracket
Knowing what to do when you get a big raise is that a rise of even 3-5% can be enough to push you into the next tax bracket. It’s because those tax brackets are set in stone. Reaching the next tax bracket might mean you will owe more taxes than your company is withholding, and it can complicate your tax return.
If you crash into the next tax bracket, you may want to consider discussing more with your financial advisor about what to do.
You can add to pre-tax retirement savings accounts such as your company 401(k), Roth 401(k), or similar. It will drop your adjusted gross income, so you stay in your current tax bracket.
Alternatively, you can donate more money to charities. However, in the US, charitable giving is only a tax deduction. Specifically, your charitable giving and other tax deductions would need to add up to more than the standard deduction to be a benefit.
Small Raises vs Big Raises
Small raises are easier to account for. As mentioned earlier, you’ll want to increase your contributions to savings by the percentage you calculated. Small raises won’t change your standard of living even if you keep all of it.
Significant raises give you many more options. How you allocate money from a substantial raise depends on what financial situation you’re in at the time. It could be one of the satisfying answers to what to do when you get a big raise.
If you have a lot of debt, it might be good not to change any other numbers and use the increased income to pay off your debt faster. Once you don’t have any holdbacks, your money can start working even harder for you.
If your retirement savings have been on hold for any reason, you may consider putting a significant portion of your raise towards investments. This can be a short-term boost, and you can constantly readjust your contributions later.
What About Bonuses?
If your company pays out bonuses, you are in a lovely position. It might only be a small amount, but a one-time lump sum payout can give you a considerable boost. Not only that, but it can also take away financial stress you might have been meditating on for a while.
It’s your money, but the worst thing you can do with a bonus is also the most popular – buying a new car. Most extras will not cover the total cost of a new car; so you’re strapping yourself in for long-term debt payments.
When it comes to what to do when you get a big raise, bonuses are plentiful at wiping out vast chunks of large debts; such as large credit card debts, college debts, or even debt you might still have on your current car. It is highly recommended to use bonuses for those purposes first.
Some people may put a bonus towards paying off a home, which is not recommended unless you’re very close to owning your home outright. Assuming you don’t have any other debts, you would be far better served to invest any bonus money in retirement or regular investments you hold.
Don’t Forget to Enjoy Yourself.
Experts recommended you to have a bit of fun when you get a raise or a bonus! You earned it, after all. Reward yourself with something reasonable that you’ve been holding off on buying. Even if you need to use extra money to pay off debts, reward yourself with a nice dinner; or an activity you don’t usually get to do.
Whether you’re paying off debts or saving for retirement, you’re living now, and you need to remind yourself to have fun along the way.
If it Hasn’t Happened Yet, What to Expect?
If you haven’t gotten a raise or a bonus yet, it might be a good idea to go ahead and plan for it anyway. When you’re presented with a sudden boost to your financial standing, it can cause you to forget your priorities.
When you don’t have extra money to allocate, it might be a good time to write out a specific plan. That way, when it does come, you’ll know exactly what to do.
What’s Next – Your Next Raise?
Getting a raise can be exciting. Hopefully, after all your hard work, it’s on the larger side rather than the smaller ones, but any improvement to your financial situation is excellent. And for that, it is equally important to figure out what to do when you get a big raise.
Here at Penny Calling Penny, we believe in making sure you have all of the information and tools you need to help plan for things like raises and bonuses. You can find several pointers on putting together your financial plan, which is the first step in any finance discussion.
Once you know your financial standing, you’ll have a good idea of what to expect when you get a raise, bonus, or another unexpected windfall that boosts your income.