AS AN EXECUTIVE, LONG DESERVING OF YOUR NEW PROMOTION, THERE IS MUCH TO BE CELEBRATED.
Years of hard work have paid off and you have been recognized for your hard work. Bonus – the pay and benefits have changed for the better…by a lot.
There can be a temptation to make a big purchase, change your lifestyle, and splurge like you weren’t able to before. For some, compensation increases can feel paralyzing, like you aren’t quite sure how to handle the perks. After all, it isn’t just an increase in your paycheck. It’s a change to your retirement benefits, bonuses, and perhaps there may be stock options to deal with and other things that can have an impact on your taxes at present and in the future.
In this article, we will outline some steps you should take when you get a new promotion in order to stay on track toward a bright financial future.
1. Shore up Your Emergency Fund
Hopefully, you have already set some money aside to help you weather the storm should an unexpected and large expense pop up. While some say that you should have three months of liquid savings available, we believe it should be up to six. Why? This emergency fund is not just to keep a roof over your head when a life emergency happens, it is to keep you invested during times of volatility in the market. If your retirement savings drops substantially during a market decline, the best way to build it back up again in the shortest period of time is to buy low when the market bottoms out. The cash reserves from your emergency fund may be able to offer stability while your investments are working hard to recover their losses.
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2. Are your expenses going to go up?
While earning more money sounds great it can often come with more expenses. Promotions often come with longer hours, more dinners out with clients or colleagues, more travel, a longer commute. Bottom line, promotions usually come with less personal time, at least for a while. This often translates into an increase in childcare expenses, dining expenses, commuting, clothing, laundering, etc. These expenses may not sound like they will impact your budget very much, but it is important to know what the bump will be and plan for that money to be set aside before you start looking at what your new net income is.
3. Increase your retirement plan contributions
Increasing your regular retirement contributions should be a priority when you receive a boost in pay. Look at your benefits package and speak to your HR rep to make sure that you are maxing out your annual contributions to your 401(k) and your IRA.
4. Will you owe more in taxes?
With every rose, there is usually a thorn. Your raise might have moved you into a new income tax bracket which means there is a possibility Uncle Sam is entitled to more of your money. But there are a lot of ways that you can offset or defer your tax liability. The aforementioned methods of contributing more to your traditional retirement accounts is one obvious way, but there are other ways you can reduce the amount of taxable income that you have. If you have an HSA, for example, you can contribute pretax income up to $7000 for a qualifying family.[i]
If you earn bonuses, you will have to pay taxes on them as well and this can also move you to a new tax bracket. Maxing out those pre-tax contributions cannot be emphasized enough, but if you have exhausted that option, then consider investing into a Roth IRA. The logic being that, though an after-tax contribution, that money is being invested and compounding over time tax-free.
5. Pay down debt and mortgage
You may still have student loan debt, credit cards, a mortgage or all three. Tackling the debt and eliminating the interest you are paying on it is like getting a whole other raise altogether. You’re no longer paying for money that you already spent. Refinancing your mortgage at a lower rate or reducing the time in which you will pay it off can help you be better prepared for retirement so that you can meet that stage debt-free. Taking the steps to reduce or eliminate your debt will open up your financial opportunities by freeing up cash to spend, save, and invest. The choice is yours but make it a good one.
Give yourself a pat on the back for a job well done. And then, follow the advice in this article to set yourself up for future success. If you have recently gotten a promotion and would like the advice of a professional advisor to help you get organized and determine a saving, investing and tax strategy that is right for you, please don’t hesitate to contact us today.