A promotion can feel like a green light to upgrade your lifestyle. But before you make any big purchases or or open new accounts, take a look at what that increased income means for your budget, your tax liability and your long-term financial goals.
“One of the biggest mistakes people make after receiving a raise or income boost is making drastic changes to their budget,” says Chloe Moore, a certified financial planner and founder of Atlanta-based Financial Staples.
“A lot of times they don’t fully understand how that raise affects their take-home pay or tax situation,” Moore adds. “They jump straight into buying a new car or a house, which can really derail their long-term plans.”
If you just got a raise or expect an increase or bonus in the new year, Moore has three guidelines to consider before earmarking that extra cash.
1. Calculate your new take-home pay
Before you start spending, Moore cautions, figure out exactly how much more money will show up in your bank account. A boost in salary can move you into a new tax bracket, meaning your net income may not increase as much as you think.
SmartAsset’s paycheck calculator can estimate your net pay after federal and state income tax withholding and FICA deductions. You can even factor in health insurance, HSAs and other pre- and post-tax deductions.
You can also compare your most recent pay stub to one from before your raise to see what’s changed.
2. Build a budget
Once you know your new take-home salary, it’s time to adjust your budget to align with your new financial reality. Don’t fall into the trap of increasing all your spending to match your higher income, though, or lifestyle creep can sabotage your long-term goals.
“If you’re going from survival mode to having extra money for the first time, that could really change things,” said Moore. “Take some time to think about what’s really important to you and what would make your life happier.”
Budgeting apps are great for beginners, because they sync your bank accounts, credit cards, investments and other debts and assets onto one customizable dashboard. Monarch lets you create custom goals, like saving for a down payment on a home, while PocketGuard sends notifications if you’re close to going over budget in a spending category.
Monarch
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Cost
$8.33/month (billed $99.99 annually); $14.99/month (billed monthly) – get 50% off your first year with code CNBC50
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Free trial
7-day free trial is available before subscribing
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Standout features
Net worth tracker, investment portfolio tracking, goal creation and progress tracking, budgeting and expense tracking
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Categorizes your expenses
Yes, but users can modify
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Links to accounts
Yes, bank and credit cards, as well as IRAs, 401(k)s, mortgages and loans
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Availability
Offered in both the App Store (for iOS) and on Google Play (for Android); web version also offered
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Security features
Utilizes industry-leading security practices, according to Monarch’s website
PocketGuard
Information about PocketGuard has been collected independently by CNBC Select and has not been reviewed or provided by PocketGuard prior to publication.
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Cost
Basic PocketGuard plan is free, while PocketGuard Plus subscription is $12.99 per month or $74.99 annually. Lifetime membership offer available at a reduced rate.
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Standout features
In My Pocket feature uses your income, recurring expenses and savings goals to determine how much you have for everyday spending.
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Categorizes your expenses
Yes, but users can customize
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Links to accounts
Yes, users can connect accounts through Plaid and Finicity to import data automatically or manually add cash accounts for tracking
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Availability
Offered in both the App Store (for iOS) and on Google Play (for Android)
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Security features
PocketGuard utilizes bank-level encryption, PINs and biometrics like Touch ID and Face ID
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Availability
Offered in both the App Store (for iOS) and on Google Play (for Android)
3. Increase your retirement savings
It’s tempting to think of any extra income as more spending money, but channeling some of it into your retirement can accelerate wealth-building, says Moore.
“If you weren’t able to contribute the full amount to your 401(k) before — maybe you only put enough to get the employer match — now is the time to increase your contributions,” she added.
Moore recommends contributing at least 15% of your annual income into a retirement account, including any employer contribution. But don’t stop there: Supplementing your 401(k) with a Roth IRA allows you to diversify your portfolio and enjoy different tax advantages and withdrawal options.
You can open a Roth IRA with a brokerage like Fidelity or a robo-advisor such as Wealthfront.
Fidelity Investments
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen
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Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
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Bonus
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Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
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Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
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Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Wealthfront
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
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Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
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Bonus
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Investment vehicles
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Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
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Educational resources
Offers free financial planning for college planning, retirement and homebuying
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Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority, grounded in relevant training and experience. For this story, we interviewed Chloe Moore, who founded financial planning firm Financial Staples in 2016. Chloe has more than 20 years of experience serving a variety of clients and serves on the financial advisory board for Bankrate and LendEDU.
She received a bachelor’s degree in consumer sciences from the University of Alabama.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice to help them make informed financial decisions. Every personal finance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
