Evaluating Your Change in Salary
A change in salary can have a major impact on your current lifestyle as well as your future. Whether you find your salary going up or down — due to a promotion, employer change, the decision to go freelance, or economic changes at your current employer — this financial transition will impact multiple areas of your life. Where should you focus your financial attention when you have a change in salary? Let's take a look at both scenarios — when your salary goes up and when it goes down.
Change in Salary: Pay Increase
Once you come back down to earth after looking at the extra digits in your new salary, it's time to take a realistic look at practices that can benefit from your pay bump. Here's a list of to-dos to help guide you through your pay increase with a requisite increase in financial savvy.
- Retirement Savings: Make sure you're maxing out your investment in both your employer and personal retirement plans. Increasing your contribution to your employer plan might mean more "free money" via your employer match to your retirement plan.
- Paying Off Debt: While your first inclination might be to slay your debt with your pay bump, make sure that you're still saving in a rainy day account so that you're not short on funds if there's an emergency. Accelerating your debt payoff can save you major dollars in interest payments, which is money better spent elsewhere.
- Think About Tax Time: That pay bump will likely give you a tax bump — as in you'll be paying more. Don't forget to adjust your tax withholding with your human resources department. If you're a freelancer and you land a choice account, be sure to stash a little extra for tax time.
Change in Salary: Pay Decrease
A drop in pay, for whatever reason, doesn't mean that you have to have a drastic shift in lifestyle. While there are changes to make, let's look at places where you can make financial adjustments to keep yourself financially afloat.
- Subscriptions: They're easy to start and easy to forget. When your salary drops, check your credit cards and bank accounts for recurring monthly subscriptions you can do without. You might be surprised to find that there are repeat charges each month for services you don't use or don't use enough to justify the expense.
- Retirement Savings: While this might seem like an ideal place to cut back on spending, don't skimp on retirement savings. Try to keep at least 15 percent of your income going toward your retirement savings at all times. The loss of compound interest in the long haul will hurt.
- Luxury Spending: While that video streaming service with the no-commercial interruptions upgrade might be swell when you're on the sofa, it could be a luxury you can't afford when you have a change in salary. Look for ways to dial-back spending on non-essential items. This might mean downgrades to your existing services (cell phone or other recurring expenses), fewer $5 coffees each week and more brew-at-home, and more trips to the grocery store instead of your favorite Thai restaurant.
A change in salary means things in your life will change. Whatever changes might come, the list above can help you navigate your new income like a pro. And remember, when more money comes along, it's best to treat it as an opportunity to save instead of spend. This way, if things swing in the other direction, you're not stuck facing a lifestyle you can't afford. Besides, it's always best to be looking at smart savings that will help you weather the road ahead.