There’s no workplace win quite like earning a raise, but once you get it, what happens?
While you might be tempted to spend it all in one place, here’s what you can do instead.
- There’s a way to both use your new income to save for the future, and still enjoy it in the present.
- New, unexpected income can result in lifestyle creep, which can be detrimental to your financial plans.
- If you think your raise might have bumped you into a higher tax bracket, don’t panic, there are strategies you can use to lower your taxable income.
How Much Money Are You Truly Getting?
Don’t hit checkout on your online shopping cart just yet. Do you know how much of your raise you will see in your bank account?
If you look at a pay stub, you’ll notice that some of your paycheck automatically goes toward state and federal taxes, health insurance premiums, Social Security, Medicare, and of course, your retirement savings.
Before making big plans with your new funds, it might benefit you to look at your first few paychecks once your raise kicks in. It’ll give you a better idea of how much of your raise you have at your disposal.
Check-In On Your Financial Goals
Once you know how much of your raise you have at your disposal, it’s time to decide how to use the funds. Now it’s time to re-visit your financial goals.
How’s your progress toward your short and long-term goals? The roadmap for how to use your additional funds follows your financial priorities. Depending on your goals, ask yourself:
- Do I have debt that needs to be paid off?
- Am I contributing the maximum amount to my retirement savings?
- Do I need to bump up my emergency fund?
- Do I want to open or add to a college savings plan to pay for my child’s education?
- I’m progressing toward my goals! Do I want to donate any money to charity?
Looking back at your financial goals and getting a bird's eye view of your financial picture will help you steer clear of lifestyle creep.
What’s Lifestyle Creep?
Lifestyle creep, or lifestyle inflation, occurs when an individual spends more as their income increases. The real kicker to identify lifestyle creep, is if you start seeing “want” items as “needs” and have the thought “how did we ever live without this extra income?”.
It's fun, and even expected to spend more as you make more, but it's important to keep that new spending in the context of the rest of your financial plans.
Lifestyle creep can be harmful because it can stand in the way of you achieving your financial goals. If you spend all of your money on “wants”, it can lead to even more extravagant spending, and losing sight of priorities like retirement savings, investing, etc.
Don’t Forget About Tax Considerations!
How could we forget about taxes? Depending on the size of your raise, you might have bumped into a higher tax bracket.
If this is the case, don’t panic, because a financial advisor can help you potentially lower your tax liability. There are a few strategies that might work for you:
- Tax-Deferred Retirement Savings Plans: You’re likely familiar with this strategy, because they’re common retirement savings accounts. Retirement savings plans like individual retirement accounts (IRAs) and 401ks can save an investor money because the funds saved won’t be taxed as income until withdrawals are made.
- Why would someone do this? Any contributions made to tax-deferred savings plans are deducted from your gross income (the income you make, pre-tax), so the investor will get an immediate tax break. But remember, IRAs do have qualifying income limits, so an IRA may not be an option depending on your income level.
- Health Savings Account (HSA): This is a tax-efficient account that can be used to save money that can be spent on eligible healthcare expenses. Keep in mind that HSA plans are only available to those with high deductible healthcare plans (HDHP), so this may not be an option for you. In addition, HSAs have contribution limits ($3,850 in 2023 for those under the age of 50).
- Why would someone do this? HSA dollars never expire, so you can also think of them as a unique retirement savings account that can be utilized for healthcare costs. An HSA helps your tax bill by using tax-free dollars as contributions that lower your taxable income.
- Claim All Applicable Deductions and Credits: Tax deductions and credits are two different things. Tax credits are dollar amounts that directly subtract what you owe from the IRS. Tax deductions subtract from your taxable income which can potentially put you into a lower tax bracket.
- Why would someone do this? They’re there for you to use! You might qualify for more deductions and credits than you think. Common tax deductions are: student loan interest, self-employment expenses, charitable contributions, state and local taxes, mortgage interest, etc. Common tax credits include: child and dependent care, energy efficient home improvements, electric vehicles, etc.
Work with your financial advisor and certified public accountant (CPA) to find unique tax savings strategies that work well for you and your financial goals.
Invest In Yourself
Now that you’ve tackled all of the important financial priorities and considerations, you can focus on how you’ll use your new funds to better your lifestyle.
This decision will likely be tied to your values. For example, if you place value on your education, you might use your raise to pay for a few college courses towards your masters degree.
Some other examples could include making home renovations, taking your family on vacation, or finally throwing the wedding of your dreams. This is your opportunity to use these funds in a way that improves your current life, rather than focusing on saving for the future. Because it’s possible to do both!
If you’ve recently received a raise and are unsure on where to start utilizing your new funds, we can help! We specialize in creating a Purpose-Driven Money System that makes you money work for you, and focuses on the idea that an amount of money isn’t the goal, but rather what your money can do for you.
If you’re ready to get started, please set up a time to meet with us.