A higher salary is reason to celebrate – and to take another look at your financial plan.
A promotion is cause for celebration. You’ve worked hard to grow your career and should be proud of your newfound success. But with the new responsibilities you’ve taken on at work come new financial responsibilities. A higher salary (hopefully significantly higher) provides the opportunity for you to reevaluate your financial position and consider where the new cash flow would best benefit you – now and in the future. Here are some ideas:
First things first, you need to see where you stand. With the higher salary, it’s a good time to reevaluate your budget and determine what the additional income means to day-to-day living for you and perhaps your family. This will help you avoid falling victim to mental accounting, where you treat your raise as separate income that can be used more frivolously. It will make you aware of what you’re working with in its entirety.
A higher salary is great, but think about your wealth as part of your net worth, which includes your liabilities, too. This means paying down any debt – like credit card debt, student loans and car loans – that’s taking away from building positive net worth. While this may not excite you as much as a splurge, it will free up more disposable income in the future and save you interest in the process.
Lifestyle inflation, where your spending keeps pace or surpasses your new income, is a common problem. Instead, consciously increase your savings – and invest in your future. There are many savings options; it’s just a matter of determining what type of investment would get you closer to your financial goals. This is where your trusted advisor can help you evaluate your options and partner with you to make a plan that achieves your goals.
A recent study from Bankrate found that only 29% of Americans have the recommended six months of expenses set aside for a rainy day. If you don’t, use your additional income to get there. While you hope good financial times last a lifetime, you never know what may happen – and it’s best to be prepared. That built-in flexibility means you’ll also be prepared to take advantage of unexpected opportunities that may come your way.
Finally, you worked hard to earn that promotion, and you should treat yourself to something special. Just remember to be a bit pragmatic about it. If you got a $10,000 raise, don’t splurge on a $10,000 item. You won’t realize the impact of the entire raise for a year and taxes will come out of that, too. So, spend accordingly.
Being thoughtful about your financial goals and how your additional income can help get you there will ensure your continued financial success.