Whether hard-earned or unexpected, promotions can bring with them many changes. From an increased salary and better benefits to a loftier title and additional responsibilities, are you ready to navigate moving up in the working world?
Ready or not, promotion here you come! If you’re wondering what you should do next, here are some steps you can take to make the most of it.
Promotion Consideration 1: Increased income
Considering your now-higher salary, it may be tempting to splurge in celebration (did somebody mention champagne?). But keep in mind that it’s likely not all take-home pay. You’ll probably see a portion of that gross dollar amount go to some familiar line items on your pay stub, like state and federal taxes as well as Social Security and Medicare.
If you’re enrolled in employee benefits, you’ll see some deductions to cover perks like your health insurance, HSA, and 401(k), too. So, while you may be excited to indulge, it might be a good idea to wait for that first paycheck reflecting your new take-home pay so you can plan. Of course, if you have some wiggle room in your pre-promotion budget, treat yourself!
Speaking of your budget, be sure to update it with your new income. This can help you visualize what your pay increase means in dollar terms at the end of the month. Before you allocate those new dollars to new expenses or spending more in your existing budget categories, you may want to do a quick check-in. For example, if you’ve accumulated any high-interest debt (aka credit cards), paying that off first could give you a strong start to improving your financial position now — and your net worth in the long term.
Pro Tip: When considering paying off other debts, like your car, home, HELOC, or the last of those pesky student loans, take their interest rates into perspective. While this is a hypothetical example, would you rather pay down your 3.5% auto loan — or have the opportunity to potentially earn 6% on your investments?
Another great area to focus on is your savings. Think restocking your emergency fund in savings, adding to your taxable brokerage account for medium-term goals, or contributing to your retirement plan for the long-term. While your “Oh $#!+ Fund” is there when you need it and your taxable brokerage can bring you the benefit of lower taxes (hey, long-term capital gains!), upping your retirement plan contributions could make for meaningful tax benefits.
Promotion Consideration 2: Taxes
When you contribute to your traditional 401(k) or similar pre-tax retirement plan, you get to skip out on paying state and federal taxes on those contributions. So if you’re putting $750 per biweekly paycheck into your tax-advantaged retirement account to max it out for the year, the whole $750 lands in that account. Plus, when you have funds for your retirement taken out of your paycheck before they hit your bank account via direct deposit, it’s more difficult to be tempted to spend them.
Another good reason to consider upping your retirement contributions with your bigger paycheck? That higher salary might have bumped you up into a higher marginal tax bracket. And Uncle Sam encourages you to save for financial independence by allowing you to add to your 401(k) pre-tax, which also decreases your taxable income — so why not take advantage of a little positive tax avoidance?
After you’ve paid yourself first in your retirement accounts, filled up your emergency fund, and have a plan to max out your traditional or Roth IRA and HSA, if eligible … watch for lifestyle creep! Earning more can easily lead to spending more — instead of saving more.
I’m not saying you should put all of your extra income toward your savings. Quite the opposite. In fact, I encourage you to give yourself permission to enjoy the fruits of your hard work — within reason. Another consideration: As your costs of living increase, the three to six months of livelihood expenses you’ve stashed in your emergency fund should increase accordingly.
One more item in tax terms: Your W-4. With a higher salary, you might need to adjust your withholdings to avoid penalties and keep your tax bill in check. To learn more, check out Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty from the IRS. Or just reach out and ask us for a tax estimate. As our client, we’ll even complete a W-4 for you that you can simply submit to your human resources or payroll department.
Last but not least, consider how higher income now — and potential future increases — could impact your Social Security benefits down the road. And keep in mind that the Social Security wage base for 2021 is $142,800. If your earnings exceed that amount, you don’t pay Social Security taxes on any dollars above it.
Promotion Consideration 3: Better benefits
What could be better than more dollars coming your way at the end of each pay period? Even robust-er employee benefits! Be sure to check your offer letter as your promotion may have come with enhanced versions of benefits you’re already familiar with — and new work perks, too.
Employers often offer their employees a specific amount of life insurance or an amount commensurate with salary. The latter is usually a multiple of that salary, like a benefit equal to one or two times earnings. While this might sound great, don’t forget that you’ll be taxed on the value of any employer-provided life insurance over $50,000. Another bright side? Group benefits, like the ones your employer provides, tend to be less costly than individual benefits.
Moving up the ladder could also come with equity compensation opportunities or the chance to become a partner in or own part of a private company. These decisions can be complex and often have their own set of unique tax implications. So, if you’ve planned your benefits on your own in the past, you may consider calling in a pro to avoid overinsuring or to make the most of these new options.
Promotion Consideration 4: Making the most of it
Being recognized for your work can be invigorating, and it might inspire you to dig further into that work with a renewed sense of purpose. But always remember to maintain balance in life.
Think about it this way: Working more hours, even on a larger salary, could mean less income per hour in the long run! Now that you’re making more, work to understand your worth. Speak with your supervisor or manager to learn how their expectations for you may have changed along with your promotion. And if you’re now the higher-up, don’t forget that you set an example for those who report to you.
There’s so much more to it than how your salary breaks down by the hour, so be sure to nourish your happiness and well-being through self-care. If you’re finding it difficult to stop pushing your professional self, one way to do this is to set boundaries and limits, if possible.
As you move from your initial excitement upon receiving your promotion to getting into the details of the benefits it brings, let us know how we can help. With unlimited meeting and consultation time included in your comprehensive services package, it’s as simple as emailing us or scheduling your next virtual consultation or phone call. We can dig into the complexities of potential tax changes, advise you on your employee benefit elections or equity compensation plan, as well as update your salary and work through changes to your budget plan worksheet with you.
And if you’re looking to begin the promotion conversation with your employer, a common place to start is by simply asking for a raise. For guidance on getting that discussion going — and seeing how meaningful a pay boost could be — check out our educational personal finance module on Increasing Your Income(s).
No matter where you are on your promotion path, we’re here for you.
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