Last time that you got a raise, you may have been shocked at how very little (or even at all) your financial situation improved. As Charles A. Jaffe famously said, “It’s not your salary that makes you rich, it’s your spending habits.”
To help you make the best out of your windfall, here are the 10 things that you should never do after you get a raise.
1. Don’t Act Entitled at Work
No matter how long you have been waiting for this raise, you should never act like it was “about darn time!” Keeping a professional attitude post-raise is necessary so that your employer has no second thoughts. For example, in 2014 the average pay raise was about 3%. If you were lucky enough to get a raise that is way above that figure, reciprocate the gesture and continue to excel in your tasks. This will increase your chances of waiting less time for the next raise.
2. Don’t Let Coworkers Know About Your Raise
While “pay secrecy” policies are illegal nationwide, it’s still a good idea to keep your salary bump to yourself. Several career experts advise against sharing your salary with your coworkers. From invoking jealousy, feeding water cooler gossip, and annoying your manager, letting your coworkers know about your recent pay bump has many undesired side effects.
Even under the very few instances it may help you professionally to discuss your salary bump with a coworker, such as when you suspect you’re still severely underpaid, the same career experts advise that those discussions have a high probability of backfiring on you.
3. Don’t Break Your Monthly Budget
When you get a raise, you may be tempted to start indulging a bit more. Before you start upgrading to a fancy $5 coffee cup from your current $1 morning beverage, take a look at your monthly budget for the past year and how many times you’ve gone over. Being over budget for two or more months is a red flag that you’re not able to stick to your budget and should keep your current expense levels.
4. Don’t Continue to Pay the Bare Minimum of Debts
Let’s imagine that you have about a $4,056.49 balance on a credit card with a 25.25% APR. If you were to continue paying only the minimum monthly payment of $132.70, you would pay off the debt in 17 years for an estimated total of $11,125! On the other hand, if you were to sock away $162 every month, you would pay off the balance in just three years for an estimated total of $5,824. That’s an estimated $5,301 in savings! Take advantage of your raise and bump up your monthly debt payments.
5. Don’t Forget to Contribute to Your Emergency Fund
One in four Americans has no emergency savings. Even those that are diligently building an emergency fund aren’t saving enough. Only one third of Americans meet the recommended six-months savings for rainy days. To become part of this group, you need to start building up or beefing up your emergency fund with part of that raise.
6. Don’t Skip a Contribution to Your Retirement Accounts
Before your raise, you may have been putting a pause to contributions to your retirement account or keeping them at a minimum. Now it’s the time to restart or bump up contributions from your paycheck to your retirement account. There are three important reasons why you should. First, nest egg contributions reduce your taxable income. Second, you have a limited amount of money that you can contribute to retirement accounts per year. Use it or lose it forever. Third, this maximizes your potential employer match (average employer match is 4.5% of pay).
7. Don’t Leave Your 401K Loans Unpaid
Speaking of retirement accounts, remember that 401K loans that aren’t fully paid back within five years become taxable income with an extra 10% early distribution tax penalty from the IRS for those under age 59 1/2. Take advantage of this salary bump to make a serious dent on those outstanding 401K loan balances.
8. Don’t Leave Your Tax Withholding Forms Untouched
The salary may put you in a different tax bracket. Take the following example:
- An individual with taxable income between $37,451 and $90,750 pays $5,156.25 + 25% of the amount over $37,450 in 2015.
- An individual with taxable income between $90,751 and $189,301 pays $18,481.25 + 28% of the amount over $90,750 in 2015.
If you were making $87,000 and receive a $4,000 raise, you would then be in a higher tax bracket and would need to adjust your Form W-4.
Here is how to check if you need to adjust your federal tax withholding:
- Review the applicable tax brackets,
- Use the IRS Withholding Calculator to determine how much you should be withholding from your paycheck;
- Find out the process to adjust your tax withholding from your HR office (some companies have digital systems instead of paper-based ones); and
- Adjust your Form W-4 (if necessary).
9. Don’t Keep Your Banking and Investment Accounts
Now that you have access to more funds, you may have the opportunity to better banking and investment opportunities. Contact your bank rep and financial manager to inquire about required thresholds to access lower fees.
For example, a credit union in Hawaii pays 0.20% for money market deposits from $10,000-$24,999, and 0.25% for money market deposits from $25,000-$99,999. An individual holding a balance of $23,000 in such an account would gain access to a better savings rate by depositing an extra $2,000.
10. Don’t Forget to Have Fun
Like Donna Summer sang back in the ’80s, you worked hard for the money, so you better treat yourself right! Take the time to celebrate your achievement and spoil yourself a bit.
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