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.