Landing a new job is exciting, especially if the position includes a pay increase! You’ve worked hard for that raise and probably feel it’s quite well-deserved. But, it’s also important to be careful to not spend those additional dollars on shopping sprees or eating out every night. Instead, use the extra income to secure your finances. Every time you change roles or get a raise, maximize your financial potential with these simple steps:
1. Revisit or create your budget
A budget should include your take-home income minus any necessary expenses such as rent, car payments, or groceries (to name a few). Having a realistic budget will create a framework for intelligent decision-making and adjustments down the road. Since you’re adjusting to a higher level of income, now is the time to deal with any areas of your budget that might have gotten away from you previously. Re-calibrate your budget to be realistic with your spending and preferences, and then resolve to stick to it going forward!
2. Save the raise
It’s easy to get caught in the trap of keeping up appearances. One of the worst habits you can fall into is spending more with incremental increases to your income. Resisting these temptations to consume can be difficult, but saving the raise really does pay off. It’s scary to think about, but if your new company suddenly goes under, you’ll be okay, while others may be absolutely panicked about how to cover their mortgage and expensive car payments. While your new job may warrant a nice dinner, it probably does not justify a new car.
3. Fortify your personal finances
Assuming that you (like most Americans) have debt, increasing your payments on those high-interest loans will help decrease future interest payments. If all your debt has been reconciled, continue making payments, but now, make them towards your savings. For instance, building an emergency fund is a great way to financially secure you and your family in case things don’t go as planned. Typically, an emergency fund consists of three to six months of income, which is just enough time to hold you through rough patches of unemployment.
4. Reevaluate your investment options
Between retirement accounts and college savings plans, there are a number of investment opportunities to which you can contribute your additional earnings. Many of these plans allow for tax-deferred growth, which can further amplify the power of your savings, and help you (and your children) avoid taking on debt in the future.
5. Take advantage of your benefits
Signing up for a company retirement plan is easy and important to your financial future. Savings in a company’s 401(k) are tax-advantaged and automatically deducted from your salary. Also, many employers will match employee contributions. Consider contributing at least as much as what’s needed for the full employer match to best maximize your benefits.
6. Consider rolling over your old 401(k)
Assuming this is not your first job, you may have a pre-existing 401(k) with another employer. You have a number of options when it comes to what to do with your old 401(k). You can leave it as is, without any further contributions, or roll it over to your new employer’s plan (if permitted) or to a new or pre-existing IRA. You should consider the fees and expenses of your available plan and IRA options, as well as other costs and benefits when deciding what to do with savings in your old 401(k). FutureAdvisor makes rolling over an employer plan to an IRA relatively simple. You may also be able to get help with the rollover process from your new employer if you decide to roll over to your new employer’s plan (if that is an option for you). Whatever you do, just don’t cash out your 401(k) when switching employers. Doing so can result in taxable income, tax penalties, and lost opportunities for your savings to grow.
Whether you are 25 or 55, starting a new job is exciting and it’s important to be aware of the financial opportunities associated with the transition and your new company. At the very least, you should save your raise, take advantage of your benefits, and consider whether to roll over pre-existing retirement plans when starting a new job. If you have questions along the way, our team here at FutureAdvisor is happy to help!
The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Clients may lose money. Past performance is not indicative of future results. Investments in securities involve the risk of loss. Any tax strategies discussed should not be interpreted as tax advice and do not represent in any manner that the tax consequences detailed will be obtained. Clients should consult with their personal tax advisors regarding the tax consequences of investing.