Financial tips for maximizing pay increases

A significant salary hike — whether due to a promotion, new position, or stellar performance — is recognition that you’re a high-value contributor.

“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, as happy a moment as it is, it can bring some complicated questions. There is a wide range of possibilities you could spend this money on, including paying off credit card debt, maxing out your 401(k) or treating yourself to a purchase or an experience — because after all, you’ve earned it. It also presents an opportunity to reassess your levels of income protection.

According to our research, financial health has a higher impact on overall well-being than emotional or physical health.¹ Yet, 37% of American workers said they avoid dealing with their finances because it’s too overwhelming.² It’s easy to avoid responsibilities and spend your raise on luxuries.

“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 Mayer. “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.”

In other words, it’s important to be financially responsible, following a process for managing your money that is both productive and protective. Here are a few tips for how to help extend the impact of your new salary.

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 Mayer. “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. Update your budget

If you don’t already have one, it’s time to create a budget. It doesn’t need to be something complicated. In fact, the simpler your budget, the more likely you are to follow it. Increasing your awareness of your spending and categorizing your expenditures based on the level of importance can help you become more confident with your finances. Having this greater insight into your spending likely enables you to thoughtfully cut spending during hard times — or treat yourself without guilt during the good.

One way to simplify your budget is to use the 50/30/20 concept. It’s a customizable recipe for living within your means, staying out of unwanted debt, and having confidence in your financial well-being. Following this plan, each month you allocate 50% of your take-home dollars (after-tax income) to your mandatory expenses (e.g., housing, utilities, groceries, insurance, and transportation), 30% to wants (e.g., eating out, travel, and entertainment), and 20% to savings. The plan should be simple but still flexible. You should revisit and adjust your budget as changes arise, such as getting a raise.

3. Pay yourself — but keep it on your balance sheet

Convert 15 to 20% of the increase into a wealth-accelerator by funneling the money into an asset, such as a 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,” Mayer says. The first thing to look at is building an emergency fund. Experienced financial professionals typically recommend having enough emergency savings to cover your living expenses for nine months, or more ideally, a year’s worth of income. With a robust emergency fund sitting in your bank, you are likely to feel more confident in your ability to weather whatever life throws your way.

This advice can be difficult for some millennials: 46% of American adults said building a solid long-term financial strategy was a top financial priority, but only 33% said they were good at focusing on their long-term financial goals.³ “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 Mayer. “We help them look at the big picture and understand the value of first carving out money to feed their asset base.”

4. Spend on what you want

Now that you’ve done the sensible things — planned your taxes and added to your assets —you get to indulge your emotional needs. Maybe financial confidence is your top priority, and you want to pay down debt. “Be strategic,” advises Mayer. “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. If you pay yourself first, you can feel guilt-free about spending the remainder on whatever you want.”

A last piece of guidance from Mayer: A pay raise is a good time to check in with your financial professional, or start working with 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.