BUDGETINGCAREER

What to Consider after a Pay Raise

As you work hard throughout your career, you have opportunities for substantial pay increases. When these moments present themselves, it can be helpful to plan for the responsibilities that come afterwards.

Let’s review a few key considerations that can help you navigate your new salary.

1. Assess your real take-home pay. When you receive an increase in salary, you may not think about the actual change in take-home pay or distribution of the raise. For example, if you receive a salary increase of $10,000, some of this will be reflected in your paycheck. However, the increase will also be distributed across any tax implications, retirement account contributions and health insurance premiums, as well as being affected by overall inflation. Therefore, it may be helpful to allow one to two check cycles to accurately assess the exact impact. From there, you can make any necessary spending changes.

2. Reassess your budget. Once you have a better idea of what your take-home pay looks like, you can review your monthly budget. During your budget evaluation, you may choose to increase what you pay your current and future self by boosting additions to your emergency savings and increasing contributions to your retirement account. Regarding your expenses, you may also consider increasing payments toward any high-interest debt. All these can be done simultaneously or through a strategy that stretches over time.

3. Avoid lifestyle inflation. It’s common for the average person to increase their spending as they receive more money, but you can avoid this phenomenon. If you tend to spend more of your funds just because you have them, you may practice the 48-hour rule to avoid impulse spending with your increased income. This rule proposes waiting 48 hours before making any nonessential purchases, giving yourself time to fully consider the purchase and determine whether you truly need an item. You may also choose to make appropriate room for fun expenses within your new budget to further alleviate any impulse spending.

4. Prepare for taxes. Depending on the amount of your raise, it’s important to prepare for an increase in the amount of taxes you pay. For some, an increase in income can shift your designated tax bracket and therefore substantially increase the amount you are expected to pay. It may be beneficial to discuss this with a professional tax expert to learn more about how this affects you.

No matter the amount, you worked hard to receive an increase in your income. It’s important to treat yourself, within moderation, to celebrate your success. The strategies discussed above can help you achieve the goals you may set for yourself. Self-discipline in the first few weeks of receiving your new check can help keep yourself on track. Continuing to reassess your budget and adjusting as needed can help maintain financial stability where it’s needed most.

Sources:

https://www.cnbc.com/select/what-to-do-with-money-when-you-get-raise/?msockid=2619cfe0e13c6fee204bd997e08a6eeb

https://www.msn.com/en-us/money/other/how-to-avoid-impulse-spending-with-the-48-hour-rule/ar-AA24U4kx