So You Asked For A Raise And Got It, Now What

There is plenty of career advice floating around the web offering tips for how to get a raise.  Ideas range from proving cost savings to your boss thanks to your efforts, or cross training in a particular specialization that makes you stand out from coworkers.  But what happens after you receive the raise?  If you are like most people the slight bump in your paycheck will be frittered away thanks to an equal bump in your lifestyle.  With 2009 right around the corner, hopefully at least a couple of you are expecting a raise at work.  Here are a few ways to make that raise really effective.

Put a freeze on your lifestyle, but not completely.  I like the idea of holding expenses after getting a raise and pocketing the entire amount into a savings account at ING Direct.  However, that isn’t very realistic.  Besides, you likely earned that raise through hard work, and should enjoy at least a portion of it.  I recommend increasing your savings contributions to various savings vehicles (see below) by about half of the amount of your new raise.  With the remaining half, go ahead and sign up for that Netflix account, or gym membership, or buy that new golf putter you’ve been eying.  Success with personal finances is about finding balance.

Where to save half of the new raise.  The first place to start is your 401(k) plan at work.  Chances are you are contributing a percentage of your income, so this boost in annual salary will automatically boost your 401(k) contributions.  Still, if you aren’t contributing through a match, I consider boosting another percentage point or two using proceeds from your new raise to obtain the match.

If you are already contributing enough to receive a match in your 401(k), consider adding the remaining 50% of your raise amount to a Roth IRA.  The earnings here grow tax-free, and you can withdraw your contributions any time without penalty.  If you have already maxed out IRA contributions for the current tax year then simply dump half that raise in your taxable savings account, such as a high yield online savings account or brokerage account.  The idea is to get the money out of your primary checking account, where it will just be frittered away in DVDs and extra stops at Starbucks (at least that’s where mine would probably go!).

Should I accept a raise, or a bonus? Some companies are offering bonuses in lieu of raises this year to lessen the increased salary budget for next year.  If given the option, take a raise over a bonus, even though the lump sum from a bonus looks appealing.  Raises are permanent (well, as permanent as anything in the job market can be these days).  Things like matching retirement funds, life insurance proceeds, etc. are based on your annual salary, and with some creative accounting companies are often able to avoid these increased expenses by offering year end bonuses instead of increasing your salary with a raise.

Comments

  1. I agree 100% on the 401(k) choice. That’s what I did when I switched jobs—bumped it up to 8% from 4% and still my salary went up, which I just saved and threw into my ING account.

    So while I didn’t technically ever “see” the whole raise in my paycheck, I didn’t need to. I see it in my 401(k) statement (the contribution part, not the returns anyway!)

  2. A raise also compounds over time because raises are usually a percentage of your previous year’s income. So each succeeding raise is increased even more because of your previous raise.

  3. @GFish Bingo!

    I utilize direct deposit for my Roth IRA, 401k, Emergency Fund, General Savings, and Checking, with each group getting a specific percentage of my paycheck instead of a set dollar amount.

    That way, whenever I get a raise/bonus/billed overtime, every part of my finances gets a raise as well. I still do x% to the Roth, just the monetary value is higher. This also allows me to upgrade my lifestyle a bit since more money goes into Checking. I can pay off debt faster too since more funds are going to Savings. If I were to come into a substantial raise that alters a lifestyle altogether, I’d consider a rebalance.

    Woe is me the day I leave the big company to work for a smaller one that might not offer direct deposit. It keeps me from my money.

  4. My present company does not offer direct deposit – which I had at a previous job. What I do now is just deposit the whole thing into my investment account, and then just take out my ‘budget’ amount… that way there’s no fudging on the spending :)

  5. We bumped ours up to 8% when my husband got his raise. We are trying to make up for the time when we didn’t contribute as much due to lower wages/unemployment so we are now playing catch-up. Great ideas!

  6. I got a raise, luckily – and for 2009, a 50% increase in the biweekly health insurance premium for my family and I via my employer-provided plan (which eats up almost all of my raise). And not to mention going from 90/10 to 80/20 payment after copay, and a higher deductible. Basically, less benefit for more money.

    Most people fortunate enough to have health insurance are going to be in same boat as a new year gets here – premiums go up every year.

    As a pretty sizable deduction from your paycheck (right up there with your 401k, maybe more), I think not even mentioning it overlooks a huge variable out of any ‘what to do you with your raise’ discussion. It may all be a moot point – your raise may just be helping you tread water for the same level of benefits you had in 2008.

  7. Great advice here. I got stuck in the cycle of consumption as I steadily earned more and more money throughout my career. My lifestyle maintenance costs increased right alongside my pay increases.

    There’s nothing wrong with a few splurges, the key is balance and harmony.

    It’s posts like these that keep me coming back. Time needs to be budgeted just like money, and I always set aside some of the precious time I do have to read Frugal Dad.

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