Getting a raise at work can be a gratifying experience. In many cases, the raise signifies an employer’s appreciation for a job well done. It also means that an employee has more income to live on for a potentially better life. Coupled with that happiness and extra income, however, comes a number of considerations for the worker.
Don’t Spend It Before You Make It
The first consideration is the most obvious but also, in many cases, the most difficult one to handle. Raises should not be spent before they are received. It’s very easy to feel good about the raise and suddenly spend more money than the amount of the actual raise.
Whether it’s that new TV or that new furniture set, the simple joy of getting the raise may cause someone to spend more than they are actually receiving and cause them to get into a bigger financial hole then before the raise kicked in.
Now this is not to say that if the raise is a significant enough that a little splurge is necessarily a bad thing. Just be careful!
Take Care of Taxes
The next consideration is taxes. When an employee receives a raise, they want to make sure that the right amount of taxes are taken out of each paycheck. Those taxes include the amounts that go to the IRS, the state in most cases, and in certain circumstances the local area taxes that need to be paid. For example, cities like New York impose a tax on income earned with every paycheck.
For most workers, the process of checking to see if the right amount of taxes is being taken out of each check is pretty easy and straight forward. They can sit down with their accountant/tax preparer and their HR contact and make sure that the number of allowances on line 5 of their IRS form W-4 (and any state forms) are enough so that the correct amount of taxes are taken out. If not, the number of allowances on line 5 of IRS form W-4 (and any state forms) can be adjusted accordingly.
Also, if enough taxes are not taken out of each paycheck and line 5 does pay enough in taxes, employees can request that extra taxes be taken out of their paycheck by filling in a specific dollar amount on line 6 of IRS form W-4 (and any state form) to meet the needed tax bill. Again, a conversation with an accountant/tax preparer and HR contact can take care of this.
Pay Down Debt
Paying down outstanding debt faster is probably the more popular use of any raise that people receive. That debt may include high interest credit cards, student loans, or car loan debt they want to retire. The mind set in paying down this debt typically is to get rid of a headache.
People feel that by paying it down, they will get some breathing room and some peace of mind. Similar to the free wheeled spending risk, employees with newly earned raises shouldn’t spend more than the actual amount of the raise.
Make More Retirement Plan Contributions
The next consideration for many employees to keep in mind when they receive a salary increase is the amount they contribute to their company retirement plan. If their monthly living expenses permit it, they should look to put more money in their retirement account. While their “current self” may not be overly excited about the increased contribution to the plan, their “future self” will greatly appreciate it when they start taking the money out.
From a tax standpoint this can also be helpful for many workers. How? As many workers know, pre-tax contributions to a qualified company retirement plan help lower an employee’s taxable income. So with every raise contributing to a company retirement plan can help reduce a worker’s end of the year tax bill. If company retirement plan contributions are not available, workers can look to contribute to their IRA accounts.
Do More Charitable Giving
Many employees realize that with much being given, much is expected. With that philosophical line of thinking many people will use the extra money they receive every pay check to give to more charitable organizations. Those charities may include religious organizations, medical research organizations or civic organization. Whatever they are those with raises feel compelled to give more and they do.
If all of these goals can be met with a raise from an employer that would be great. If only a few can that’s fine as well. The most important thing for anyone with a raise to do is to think through what is important and what needs to be taken care of first.
It’s Founder, Kolonji Murray, has worked as a banker, accountant and financial advisor for a number of leading firms. He holds a degree in Accounting from Hampton University and is active in a number of civic and industry organizations. Along with being an Accountant Mr. Murray is Series 7 and 66 licensed in NY. He is also life, accident and health, variable life/variable annuities insurance licensed.