Ask a financial professional: I got a big raise. Now what?
So, you got a raise? Congratulations!
A significant salary hike—whether due to a promotion, new position or stellar performance—is recognition that you’re a high-value contributor doing a great job.
“Back in the day, salary increases typically occurred mid to late career,” says Nichole Mayer, RICP, a Wealth Management Advisor at Westpac Wealth Partners in San Diego. “Today, we see income leaps at all stages of professional life. Now they align more to quality of work than seniority.”
When you get a raise, the emotional payoff is straightforward. But the economic considerations can be complex, especially for high-achieving millennials. It presents all kinds of questions:
• Should you whittle down student loans?
• Pay off credit card debt?
• Sock it into savings?
• Max out your 401(k)?
• Or indulge yourself—hello, dream vacation—because, darn it, you’ve earned it?
“Usually when household income goes up, the increase is spent on lifestyle. And if anything remains, it goes to savings. But often there’s little or nothing left, which leads to guilt and anxiety,” says Nichole. “We need to change that mindset so people pay themselves first and then can pay down debt and indulge in lifestyle spending with no guilt.”
1. Plan for taxes
Do this first, because a $10,000 raise on paper may only net out to $7,500 or so in your pocket depending on your tax situation. “People tend to overlook the tax liability on an increase,” says Nichole. “Talk with HR to increase your withholding or, if you’re self-employed, set aside more money to avoid a painful surprise next April 15.”
2. Pay tourself—but keep it on your balance sheet
Convert 15 to 20 percent of the increase into a wealth-accelerator by funneling the money into an asset, such as savings account. This is a crucial point. Don’t confuse rewarding yourself—spending money on an indulgence with little or no lasting economic value—with paying yourself. “Paying yourself is about putting a portion of your raise into an asset that will keep the money working to help optimize your financial future,” says Nichole.
This advice can be difficult for some millennials. “The initial thought of many professionals in their late 20s and early 30s is to apply the entire increase toward chunking down debt or buying something shiny and nice,” says Nichole. “We help them look at the big picture and understand the value of first carving out money to feed their asset base.”
3. Spend freely
You’ve done the sensible things—planned your taxes and added to your assets—and now you get to indulge your emotional needs. Maybe financial confidence is most important and you want to pay down debt. “Be strategic,” advises Nichole. “With credit cards, for example, look at the interest rates and the balances. Consider paying off the card with the 23% interest rate and keeping the balance on the one with the 9% rate.”
But if you want to take a trip or buy a new wardrobe, then do that, she says. “We work hard so we can play hard. As long as you pay yourself first, you can feel guilt-free about spending the remainder on whatever you want.”
Last piece of guidance from Nichole: a pay raise is a good time to check in with your financial professional, or even work with your first one. “We can help you look at the big picture—your goals, responsibilities, income—and ask the tough questions. That perspective can help you make an educated decision on how to disburse your money.”
Nichole Mayer is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. WestPac Wealth Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License #0F54659
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2021-126122 Exp. 09/23