Four Ways to Get the Most Out of Your Pay Increase

With the end of the year just around the corner, it’s time to be thinking about what’s coming for next year. A survey by Towers Watson of 1,100 mostly large employers found that the average increase in base pay for workers in 2016 will be about 3%. In addition, if you work for one of these companies, you can expect, on average, about a 5% annual bonus. What will you do with all of that money?

Some of it will go to cover the increase in the cost of living, but over the last year, and the last several years, that has been negligible. The Consumer Price Index is up only 0.5% as of the end of November for the prior 12 months.

So what to do with the rest?  If your annual income is $60,000, a 3% pay increase pre-tax will amount to $1,800 for the year, which will be about $70 per paycheck or  $52.50 after federal taxes. Your pre-tax bonus will be about $3,000, but after taxes it will get whittled down to $2,250 or less. However, if you act now, you can get much more out of these extra dollars. Here’s how.

  1. Are you taking full advantage of your company’s retirement plan match? Employer matches to retirement plan contributions are commonly as much as 3.0% of salary if you contribute between 3.0% and 6.0% of your income. That means that you could as much as double your pay increase if you aren’t currently taking full advantage of the company match.
  2. Are you maxing out your retirement plan contributions? Even if you are getting the full match, if you haven’t maxed out your contribution to your retirement plan, your pay increase is a painless way to increase your contribution. The tax free investment returns will increase the value of those extra dollars.
  3. Do you have credit card debt? If you apply your bonus to reducing your credit card balances it will increase the value of the extra money by almost 16%.  Applying the $2,250 in after tax bonus to reducing your credit card debt will save you about $360 in interest. If you’re getting your full employer match, you can dedicate your pay increase to the debt reduction cause as well.
  4. Do you have an IRA? If you have maxed out your retirement plan and you don’t have any high interest debt, you can open or add to your Individual Retirement Account with your bonus. When I received bonuses from work, they always funded my annual contribution to an IRA account. Here again, the investment returns will multiply the value of your bonus over time.

You might be thinking that there are any number of things on which you can spend your extra money that would be far more fun than these suggestions. But there is nothing so satisfying as seeing your retirement accounts grow or your debt decline. If you are rewarded for your hard work this year with a pay increase or a bonus, maximize its value by putting it to work for you.

 

 

 

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