3 Ways to Get the Most Out of Your Raise

By Mitchell J. Smilowitz, CPA

For many organizations in the Conservative Jewish Movement, July marks the beginning of the new fiscal year. For some JRB plan participants that may mean an increase in compensation. This article discusses how you can get the most out of your raise.

Here’s an example. Prior to his raise, Richard received $50,000 in salary. He gets a 3% salary increase. This amounts to about $1,500 per year or $125 monthly – before taxes. Richard is probably in the 22% federal tax bracket. After taxes, Richard will see an increase of about $97.50 in his monthly take home pay. It may not look like a lot of money, but even a modest salary increase can improve his financial situation.

How can Richard make the most of his additional income?

Boost Emergency Savings

If something unexpected came up, like a medical expense or car repair, could Richard come up with $2,000 in the next month? According to a study by the Financial Industry Regulatory Authority (FINRA), an organization authorized by Congress to protect investors, about 43% of Americans probably or certainly could not come up with that money. And 54% of Americans don’t have enough saved in rainy day funds to cover three months’ worth of living expenses.

If Richard does not have an emergency savings fund, or a sufficient amount saved, creating a cushion for unexpected expenses is a good use of his additional income.

Increase Retirement Contribution

Once Richard establishes an emergency fund, increasing his retirement savings is a great way to leverage the value of his raise. Because contributions to his JRB retirement account are made pre-tax, for every dollar Richard contributes to his retirement fund, he only gives up 78 cents in take-home pay. The tax benefits are even greater for those paying state income taxes. Over 30 years at an average 6% rate-of-return, increasing his retirement savings by $125 monthly will add over $125,000 to Richard’s retirement account.

Would you rather add $97.50 to your monthly take-home pay or over $125,000 to your retirement savings? By contributing more to his retirement account, Richard lowers his taxable income and puts the full power of his raise to work building a secure financial future.

Pay Off High Interest Credit Card Debt

If you carry credit card debt, using the additional income from your raise to pay it off sooner can be a good idea. Here’s how it works. Richard makes the minimum monthly payment on $5,000 in credit card debt at 18% interest. His particular card calculates the minimum payment at 3% of his balance, making it $150 per month. If he paid only the minimum, it would take over 16 years to pay off the debt and cost almost $4,700 in interest. If he increases that payment to $250 per month (his raise gives him an additional $97.50 each month), he could be rid of the debt in two years, paying less than $1,000 in interest.

The caveat: Richard will need to change his spending habits so he doesn’t continue to add to his credit card bill. Otherwise, he’ll make little progress to his ultimate goal of eliminating his high-interest credit card debt.

What Option is Best for You? 

Seeing your compensation go up is cause for celebration. At the same time, for most of us, the increase is not enough to resolve all of our financial challenges. We still need to prioritize our financial needs in order to maximize the impact of the increased income. Being intentional about our choices can lead to long-term financial benefits and ensure that our extra cash doesn’t disappear each month.

How can you make the most of your compensation increase? Contact the JRB at 888-JRB-FREE (572-3733) or send us an email for a one-on-one discussion of what makes sense for you.