Congratulations, You Got a Raise – Now What?

Raises are exciting and something to be celebrated, but how can you effectively use them for your benefit? Set yourself up for the future with these 6 tips for utilizing your recent raise.

As we begin Q2, most Biglaw associates (and many partners) are seeing a raise in their paychecks. Whether that’s you or not, it seems like a good time to talk about raises and strategies for protecting your hard-earned income.

The Money Keeps Rolling In Year After Year

One of the benefits of being a lawyer is that pay raises often follow a set formula. This is true even for?lawyers working in the public sector. There’s just something about the legal profession rewarding lawyers based on years of service rather than merit. Of course, this changes completely when you’re a business owner, but salaried legal jobs seem to follow this pattern.

Knowing that you’ll have automatic pay raises in the future and planning for it is a great strategy for strengthening the discipline muscle that allows you to convert more of your income into wealth.

After all, that’s the goal right? You want to?convert as much income into wealth as possible!

Many young lawyers confuse having a high income and being wealthy. Those may seem like the same thing, but they’re really not – especially if and when the high income disappears! True wealth will occur if you can successfully convert the stream of income into assets.?As I’ve suggested in previous articles: it’s not how much you earn, but how much you keep!

Automatic Pay Raises Make It Easy

No matter how much you’re making today, you’ve probably already adjusted to that amount of money. Whether you’re a budget pro or you spend based on your bank account balance, you have an innate sense of what’s coming in and what’s going out each month.

Lucky for you, you won’t miss a raise if you never see it. It’ll have zero impact on your standard of living and yet you can watch your net worth balloon! All you have to do is take a couple of steps now (and this is really the hard part) to set yourself up for the future.

6 Ways to Handle Your Recent Raise

So, I’ve come up with a list of things you can do today – before the raise hits your bank account and you’ve become used to it – to make yourself wealthy:

1.??????Immediately start maxing out your TFSA – If you’re a junior associate, the raise in your base salary could be $10-20,000. This is a great way to take advantage of not only this year’s contribution room ($6,500), but also make up for previously missed amounts (the maximum would be $88,000 if you were 18 or older in 2009).?Don’t know what to invest in? Throw it into a low-risk balanced fund.

2.??????Start or build your emergency fund – Many lawyers benefit from the piece of mind that comes with an emergency fund. What’s an emergency fund? It’s a few months (I recommend 4-6 months worth) of living expenses saved up in case you get fired or decide to press the Biglaw eject button. Knowing that?you have a safety net?which will last you for a long time is priceless.?For some where cashflow doesn’t allow or where the savings habit isn’t automatic yet, they can look to their TFSA as one source of emergency funding.

3.??????Start contributing to your RRSP – With the 2022 RRSP deadline having just passed, we’re too late to contribute for the 2022 tax year.?That, however, doesn’t mean you can’t get a head start for 2023 – start, systematically, setting aside a portion of that new-found income each month into your RRSP.?This will allow you to help offset the additional taxes that the raise will create.

4.??????Accelerate Payment on Student Loans – Multiply your raise by 0.67 and then divide by 12 to get a rough idea of how much extra you’ll be bringing home (after tax, based on a total income of about $150,000) each month. Sure,?refinancing student loans?can save you thousands in interest but now you can increase your automatic student loan payment by that amount. In other words, a $20,000 raise means an after-tax increase of about $13,400 a year or $1,116 a month. Increase your student loan payment by that much a month and watch your student loans melt away that much faster.

5.??????Invest in yourself – Invest in yourself and your professional development. Continuing education courses, conferences, and coaching can all help you gain the knowledge and skills you need to succeed in your career. This is a smart move that can further pay off in the long run as it shows your commitment to the profession, a willingness to learn and grow, which can enhance your reputation and credibility.

6.??????Start saving money for a wedding, engagement ring, first home – That’s going to cost you some cash at some point. Do you want to fund it out of current cashflow or know that you have a few grand saved up when the time is right?

Let’s talk about it.?What other ideas do you have for how to use your raise? There’s a million things to save for and if you don’t take action who will? What strategies have people employed to make sure to keep as much of a raise as possible??Please feel free to add your thoughts in the comments – we’d love to hear from you.