Give Yourself A Raise! - How To Maximize Raises and Bonuses
It’s that time of the year again, the wonderful time of raises and bonus checks. Most people look forward to this time for most of the year, it’s what keeps them motivated to perform well in their day job each day. Unfortunately, it’s also the case that most times the extra amount on the paycheck doesn’t go toward anything specific, but gets sucked up into the daily spending habits.
It’s time to take a different approach with that extra dollar amount available to you. In a prior post (I Need To Be Saving How Much?), it was discussed that a normal family should be saving 15% of their income to support themselves in retirement. If you are not at the 15% level, this is your chance to make some headway toward reaching that goal.
The Benefit of Saving the Extra Today
With the average salary increase of 2.5% in the United States in 2015, it is sometimes looked upon as a small amount. If we take a household income of $100,000, it would equate to an increase of $2,500 annually. To take it one step further, if you receive bi-weekly paychecks, it would mean you would see an additional $60-$90/every two weeks. What a difference! $2,500 in a year versus $60 every 2 weeks, do you see how this can just be sucked up into the everyday spending?
If the $2,500 is all saved, it turns into an extremely large amount over the years. Take for example that you are 35 years old, if you save the $2,500 this year and each year in the future until retirement at age 65, which equates to $75,000. But the value that comes from saving is not just the principal amount being saved, it’s from the compound interest and earnings that accumulate over the years. If you assume that you can earn 5% annually on this additional money being saved, it would equate to $185,000 at age 65.
Yes, you are reading that correct, by taking this year’s 2.5% salary increase and committing to save it this year and each year in the future, it is an $185,000 decision.
How to Make the Most of Your Decision
The best decision you can make when saving your raise, is to put it in a tax advantaged savings account. Here is my personal ranking on where to save it:
- Increase 401(k) rate if you have a company match available and are not currently maximizing the amount that they will contribute to match
- If your income is below the Roth IRA limits, put it into a Roth IRA to protect the earnings from taxes in the future when you decide to use the money
- If you get the maximum company match on 401(k), do not meet the Roth IRA income limits, or already max out the Roth IRA, increase your 401(k) rate accordingly to take the extra dollars into account
The Long Term Effect of Saving Your Increases
You can see the large impact to your financial situation by saving one year of raises for the future, but think about what happens when you do this every year. It doesn’t mean that you have to do it with the entire increase, but even if you split it 50/50, the benefits will have a large impact. It’s important to treat yourself once in a while as well, so take a chunk of the money and do something fun with it, but make sure to secure your long term financial security as well!
The goal is to get to 15% savings, by using raises to your advantage the 15% can be attained in a matter of a couple years even if you are just beginning the savings adventure.
Daniel is the Founder of Simplicity Saving and has worked for numerous companies, ranging from 5 employees to 47,000 employees, and in positions ranging from Financial Analyst to Chief Financial Officer. Over the course of his education and career, he also developed a passion for personal finance. Through lots of research and collaborating with other personal finance enthusiasts, he has developed a methodology that is easy for others to understand and implement in their daily lives.