Congratulations! If you’re reading this post, there’s a good chance you either recently received a pay increase or you’re expecting one in the near future. For those of you not seeing a raise any time soon, these thoughts will be valuable tools when that day comes and can apply to any type of income increase, whether through a raise, rank promotion, or side hustle. Getting a raise can be a wonderful boon for your financial future, but if you don’t handle it properly if may make little difference. Here’s what you want to consider.
Understand Your Paycheck
It’s important to understand what your paycheck will look like when you receive a raise because you would not want to change your budget only to find out you’d miscalculated your actual take home pay. Our first piece of advice is to wait to make any budget changes until you’ve received your first new pay check. This will give you the chance to see what that increase will actually be before you spend that money.
Will Your Taxes Change?
Military pay represents a very unique tax situation, unless you are serving in an active combat zone or qualified hazardous duty area your income (including base pay, special pay & bonuses) will be taxed. Therefore any increase in pay you receive will have a tax implication, uncle Sam always gets his due!
You may not see a big change in your taxes if you’re only getting a cost of living increase, however if you’re looking at a decent 5-10% raise or more (such as a promotion), be sure to understand the tax implications of this increase to your income. Will it change your tax bracket? Unfortunately a raise doesn’t mean you get that amount going right into your pocket each month.
This is a specific military paycheck calculator that can help you calculate your take-home pay–Military Paycheck Calculator. You always want to base your budget on your take home pay.
A Raise Does Not Mean A Change In Lifestyle
Let’s avoid the temptation of thinking that a raise means you have to increase your spending. A raise doesn’t necessarily mean it’s time for a bigger house, new car or more grown up toys. We all know this is true but if we didn’t say it we would feel guilty thinking someone might miss out on a huge opportunity because they fell prey to this American fallacy.
This leads into our most important message:
Take Advantage Of Your Raise By Not Changing Anything.
It’s tempting to want to increase your going-out fund, your grocery budget or your “treat-yo-self” budget item because you have more money. We can’t say that giving yourself a little more leeway in these areas is wrong but we would like you to slow down and consider what an opportunity you have here. Many people live in a constant state of lifestyle inflation, where getting a raise leads to an equal increase in spending. This keeps them from getting ahead or making real progress toward their financial goals. What if instead you leveraged your raise and treated it as if it never happened? You continue to have a budget based on your previous pay and bank the increase.
If you’re receiving a raise in this range, you’re generally looking at a cost of living increase. This doesn’t seem like much and for some people earning $30-40k a year it really doesn’t add up to very much extra cash each month. However you’ve been living OK this far right? If you’re able to make all your ends meet why not take advantage of this opportunity to live as if you’ve received no raise and have it automatically deposited into a savings account? You can also throw it toward your credit card debt or your car payment. You didn’t have it before so you won’t miss it now!
Our advice doesn’t change much between a small cost of living increase and a sizable raise, however there are some percentages we want you to consider if you’re getting a bigger increase to your monthly pay check.
Mr. Money Mustache is one of the most prolific and popular financial bloggers of all time. He is best known as an advocate for frugality and he is on a constant quest to convince everyone to live free of consumerism. He challenges reader’s of his blog that saving 50% of your income is a goal everyone should work toward. If you’re able to live off of only 50% of your income, you’re preparing yourself for a very sustainable future. Why not use your raise to get closer to this lofty goal?
While this seems impossible for many people, we hope that those fortunate few who are receiving a good raise might consider this an opportunity to take a big step toward this 50% milestone.
More than 10% raise
Congrats! We don’t have any advice that differs from above for you, but we want to celebrate with you for either your big promotion or because your superiors have finally realized that you were incredibly underpaid!
Our simple response to ‘how to adjust your budget when you get a raise’ is ‘Don’t!’
If you’ve ever heard yourself say “I don’t have enough money to save or pay off debt” then you are exactly the type of person we’re hoping takes this game-changer and runs with it! Leverage the opportunity by not changing your habits and increasing those often overlooked areas of saving and paying off debt. You’ll thank yourself later.
What have you done when your income has increased. Do you have any advice for your fellow service members?