With many companies, employees can expect getting a raise after a period of time or after hitting certain milestones at their job. This is a very exciting time, as this generally means they will be getting paid more money each year. With this increase in salary or wage, it is up to the employee to manage their extra income. Some people handle their raises well, while some make financial mistakes. Below, you will find a few common mistakes people make after getting a raise at work.
Keeping Monthly Debt Payments the Same
It is reported that about 82% of millennials1 have some form of debt that they are paying off. Hopefully, the people who are in debt are making their required monthly payments to pay off their amount owed. It is recommended that people who are in debt pay as much as possible towards their debt payments. This way, the amounts that are paid off will not collect additional interest and the debtor has the potential to pay it off faster. After getting a raise, there is often more income that can be put towards debt payments, which can help speed up the process of paying off debt. If you have recently gotten a raise and are in debt, it would be wise to put some of the extra money you are making towards your debt payments. This may feel upsetting and even annoying now, but you will thank yourself later once you are done seeing a large percentage of your income going towards paying off debt.
Not Increasing Their Emergency Fund
As you may know, an emergency fund is a savings account that holds accessible cash in the case of an emergency, often enough to cover three to eight months of monthly expenses. This is to help out if there is ever severe damage to your home, if you lose your job unexpectedly, or any other situation that can drastically affect your finances. When you get a raise, usually your rate of spending will go up, which means you should be increasing the amount in your emergency fund. The point of an emergency fund is to help ensure you can remain comfortable and can afford your usual spending habits, despite experiencing a job loss or other emergency. So, with a raise in salary, an increase in the emergency fund should follow soon after.
Contributing the Same to Their Retirement Account
Similarly to not paying off more debt each month and not increasing contributions to an emergency fund, it can be beneficial to invest more into your retirement account. Planning early on for retirement can be very important to your future, and it is smart to put a large percentage of income towards your retirement savings. Whether you have an employer-sponsored retirement account or a non-employer account, it is a good idea to increase your contributions when you get a raise.
Spending Instead of Investing
When people get a raise, many feel the need to reward themselves by going out shopping and buying expensive items. Whether this be purchasing a new work outfit, a new computer, or even a new car, shopping is a typical when people get the news that they will be getting more income. Unfortunately, this may not be the best financial decision to make after getting a raise.
While rewarding yourself for your hard work is not a bad thing, it is important to save some of the extra money you will be making. Putting some of the money aside for investments can be a better use of the money received from the raise. Some examples of investment vehicles are mutual funds, stocks, or bonds.
Not Taking Taxes Into Consideration
If you get a $5,000 raise, you are not going to see an extra $5,000 in your bank account at the end of the year. Many people forget that their raise will be taxed just like the rest of their income. So, this means you should not spend as though you are truly making however much more you will be getting with your raise. If you would like to know how much of a raise you truly are getting, multiply the amount by the taxes you are subject to and subtract that from your raise. For example, if you fall into the 20% tax bracket and received a raise of $5,000, your raise is actually $4,000. If you live in a state with state income tax, you will need to subtract this as well. Be sure to do this calculation before moving into a more expensive home or purchasing a new car, as you may not be able to afford it.
Partaking in Lifestyle Inflation
If you have not heard of lifestyle inflation, it is where your lifestyle changes based on how much income you earn. This means that after you get a raise, you change your lifestyle and start spending more than you did before. While it is normal to change your lifestyle as you get further into your career, getting a raise should not cause a drastic change in your life. This is why it is important to create a budget for yourself, and stick to it, no matter how much more money you are getting each year. Make room in your budget for you to live comfortably, but always allowing for a percentage of your income to go towards savings and investments.
Not Contacting a Financial Professional
Getting a raise can be a big deal. Not only does it show your company appreciates and recognizes your great work, but it also means you have big decisions to make about your finances. No matter how large your raise was, it is still always a smart idea to contact a financial professional if you have questions about wealth management. If you would like some personalized advice or more information about spending your income wisely, please contact us today. Our professionals will help you understand appropriate places to invest your money and how to make your money work for you.
1 “The Details of Debt: How Debt Impacts Americans’ Quality of Life” Anonymous Nitro College, Feb 16, 2018
The subject matter discussed in this article is for informational purposes only. It is not intended and should not be relied upon as investment or financial advice and does not constitute an offer, recommendation, or solicitation.