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How to Adjust to a Higher Salary

Receiving a raise at work or accepting a higher paying position might be the career validation you need. But as you climb the corporate ladder -- and perhaps jump to a higher tax bracket -- it's important that you make wise financial choices.

A salary increase can trigger a complete lifestyle change, giving you additional options in life and more opportunities. But while some people see an income bump as the chance to upgrade their life, there are better uses for this money. It's certainly an adjustment period. However, keeping your eye simple can ensure you put this extra cash to good use.

#1. Don't go on a spending spree


After estimating how much you'll have in disposable income once your raise goes into effect, you may begin making plans for the extra money. Maybe you'll buy a new flat screen television, purchase a luxury car, buy expensive clothes or splurge on other high ticket items. It's okay to enjoy the fruits of your labor, but if you go overboard or get into debt, you could end up living paycheck-to-paycheck within the next couple of months. Buy a few items that you "need," but be reasonable and try to live beneath your means to secure your financial future.

#2. Create a debt repayment plan

Rather than add new debts once you receive a salary bump, view this as your opportunity to get out of debt. The less debt you have, the easier your life will be. Whether you have credit cards, auto loans, student loans and other loans, increasing payments to your creditors can get rid of these debts sooner, saving you money in interest and simplifying your finances. Additionally, you might use some of your salary increase to pay down your mortgage loan faster. Adding money to your principal each month or switching to biweekly payments can pay down the loan quicker.

#3. Get better coverage

If your current health insurance has a high deductible or co-pay, your salary increase may afford a better health plan -- or perhaps provide the opportunity to purchase coverage if you're currently uninsured. Likewise, a salary increase can provide the cash you need to purchase a life insurance policy, disability insurance or any other coverage you lack.

#4. Save a rainy day fund

If you have hundreds or thousands in disposable income each month, it might be hard to imagine your life without this income. However, your financial situation can change in a moment's notice, either due to job loss, an injury or an illness that prevents work. Be smart and deposit the majority of your pay increase into a rainy day fund. Let's say your pay increase adds $1,000 to your paycheck each month. If you were to live off your old salary and deposit every cent of your raise into savings, that's a savings of $12,000 a year.

#5. Increase retirement contributions

Maybe you felt that you couldn't afford to save for retirement before your salary increase. Now that you have extra income each month, look into retirement savings accounts, such as an IRA or an employer-sponsored retirement plan. Aim for a monthly contribution of at least 5% of your monthly salary.

#6. Plan for additional taxes, if you're self-employed

As an employee, your employer will deduct federal and state taxes from your income. But if you're self-employed, don't forget to increase the amount you set aside for taxes each month. For example, if you're in the 25% tax bracket and you earn an additional $1,000 a month, you'll need to save an additional $250 a month for income taxes.

What are other practical ways to adjust to a higher salary?

20 percent discount
20 percent discount

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