Financial Tips After Landing a Promotion
A promotion is certainly a career event to be celebrated, but you've worked hard for your money, so treat it right. Fortunately, there are several steps to take that will help you make the most of your growing income.
Adjust Your W-4 Tax Withholdings
The first thing to do after a promotion that brings increased income is to visit your payroll department and fill out a new W-4 tax form. Employers use this information to set aside the income taxes their workers owe the government every year. If your increased earnings aren't reported, you'll be paying taxes on your old salary.
While it might be tempting to reap the short-term benefits of a higher paycheck due to untaxed income, you'll pay for insufficient tax withholdings come tax season. It's also important not to withhold too much money from your paycheck because any refund you receive could have been invested or used to pay off debt.
The Internal Revenue Service (IRS) has an online calculator to help you determine what amount should be withheld from your paycheck. If you file jointly with your spouse, you'll want to make sure you're each withholding the proper amount for your tax bracket.
Stick to Your Budget
Resist temptation to keep up with the Joneses. You survived on your previous income until now, so it's wise to continue living on your existing budget. Talk to your financial planner about how best to invest your additional income and add to your nest egg. If you have credit card or student loan debts, start with the accounts that have the highest interest rates and double or triple your monthly payments.
Consider Long-Term Investments
If you were planning on purchasing a new vehicle or home before your promotion, you were wise to wait. If you have a favorable credit score, your new, higher income may help you qualify for a lower interest rate on loans for major purchases. Even one-tenth of a percentage point decrease in interest can save you thousands of dollars over the life of a 30-year loan, and the higher your interest rate is, the less you'll be able to borrow because your monthly payments will be higher.
If you're thinking of upgrading your car or upsizing your condo because your promotion allows you to afford a more substantial monthly payment, analyze your overall finances for several months before making a decision.
Donate to Charity
It might not be the first thing that comes to mind, but a pay hike or a signing bonus can be used to help those in need. If your promotion comes with a significant raise, you'll need to up your itemized charitable contributions to offset higher taxes associated with your new salary. Research how much you'll need to donate to IRS-approved, tax-exempt organizations to help you save on your taxes — in general, giving is a win-win. Generosity also positively affects the brain, which might help you perform better in your new role.