This year, median base salary increases are in the range of three percent for most American workers. Since that is still below pre-recession levels, you can’t afford to squander any extra money that comes your way.
Lisa Brown, a CFP and wealth adviser for Brightworth, says one of the most disappointing things she sees is when someone gets a big raise and they install a pool in the backyard, but they haven’t saved any money for college or retirement. Once you blow your pay increase, it is very hard make that money back, she says.
One option is to think in thirds — one-third for retirement, one-third toward your mortgage and one-third to enjoy, she says. But even if you choose another path, it pays to plan ahead. “The key is to do it before the pay raise comes,” Brown says. “Most people want to feel that money coming into their hands. If you never have the money, you will never miss it.”
One of the best things you can do is set up automatic withdrawals from checking accounts into investment accounts such as an IRA or 529 account, Brown says. If you are not at least contributing the minimum amount to your 401K to get the maximum company match, increase your contribution to meet that amount, Brown says. If you are already getting the company match, use your pay increase to max out your contribution for the year — $18,000 for anyone under age 50 and $24,000 for those 50 and over.
Anyone with a significant amount of consumer debt, should pay down aggressive debt while also socking away part of their money into rainy day savings. “If you are drowning in debt, absolutely get on top of that because it will just derail all of your other financial plans,” Brown says.
You should also think beyond financial goals and consider your lifestyle goals. Over time, as your income increases, your lifestyle also creeps up. When you get a pay increase, think about increasing your insurance, says Brown. “If I made $100,000 and my family was used to that and now I am making $250,000 and now we are accustomed to that, I probably need to increase my insurance planning for life insurance and disability,” she says.
Another area people don’t think about in connection with pay raises is estate planning. Re-evaluate the plans you have in place when your income goes up and make sure you have the right beneficiary designations.
Of course, life is all about finding balance, says Brown. As a financial advisor, she wants to see people making progress on their financial goals, but at the same time, anyone getting a promotion or a raise is probably spending more time working.
Use your money to get you closer to your financial goals, but also to create memorable moments with friends and family.