At work, my group has undergone several manager changes since I've been employed. Currently, we have a temporary manager while the upper-level management tries to find a suitable fit for our batch of guys. It's expected to be roughly a month before we get a new, more permanent manager. Earlier this week, though, I got to see my last manager walking around our building with a stack of letters. I knew that could only mean one thing - raises!
Ah, my first raise - how exciting.
Everyone at the company got one, so it isn't like I'm a top performer or anyone exemplary there. In fact, like Mike Judge's character, Bighead, being unassigned in Silicon Valley, lately I feel I've been doing very little, so I don't believe I actually deserved any additional compensation. But I'm not going to refute it - more never hurts!
The Current State
In the past couple of years, raises at my workplace have been non-existent or close to it. So when I heard from our CEO that raises were significantly higher than they have been in the past, I was expecting something around 2%. It was a nice surprise to see it actually closer to 3! Precisely, I received a 2.98% bump up, which equates to an additional $140/month of salary (before taxes). But though my salary only increased by a few fraction points, that bump actually impacts me a lot more than the 3% figure!
I hadn't announced it yet (I figured I'd save it for the next monthly review, but what the heck), but this month I changed my 401k contribution rate to get more in-line with the $40,000 liquid assets goal I set for myself at the beginning of the year.
Before the raise, I had just started to contribute 45% of my pre-tax salary to be able to max out my 401k contributions at $18,000 by the end of 2016. (Now, it should be less, but I won't recalculate until next month.)
Before the change in my contribution rate, I was only contributing 8% of my salary to get my employer's maximum match of 9%. Contributing an additional 37% should significantly reduce the amount of cash I can touch "right now" in an individual paycheck. Because of withholding allowances (and me changing them to get next year's tax refund as close to $0 as possible), I'm not entirely sure of the amount I'll be seeing with each paycheck, but it should still be plenty more than needed to maintain my current lifestyle.
Before the raise, I had changed my federal and state withholding allowances to see an extra estimated $200/month. This was the impact of maxing out my 401k! Because that amount it tax-deductible, my 2016 taxes will be significantly lower, meaning that I get to keep more of the pay I earned! With the contribution increase, I estimated seeing a drop of actual cash in a paycheck, going from roughly $3,300 (after the withholding allowance change) to around $1,900. (Again, I don't know how the withholding change will adjust this number so I may be off.)
An additional 3% might not sound like much, but when you already max out your 401k contributions, 3% is huge!
Give Yourself A Bigger Raise... Relatively
Most people my age (but not everyone, for some crazy reason!) understand that contributing 8% of their salary nets them an extra 4% so they do contribute that 8% of their salary to their 401k. But most people DON'T max out their 401k or contribute to a personal IRA!
I'm still getting an additional 9% on that amount from my employer's 401k contribution, so that's another free $12.60/month (or $151.20/year) into my 401k! Everyone who is contributing 8% will get this. Out of the $140/month bump, I will see $101.06/month after all taxes are deducted from it. Note that if I wasn't maxing out my IRA and 401k, my federal tax rate would be at 25% instead of 15%, meaning that out of that $140 raise, I would only see $88.11/month - translating to an additional tax loss of $13.15/month, or $157.83/year!
For someone making the same amount that I do and only contributing 8% to the 401k and nothing to their IRA, remember that they would see $3,100/month in cash after taxes. Adding in this 2.98% raise, they'd now see closer to $3,188/month, or a 2.84% increase in "now" cash. Such a small amount is easily lost because, as we know, the people who don't watch their finances believe they are now making an additional $140/month and believe that they can spend appropriately. Hence, getting themselves further from financial independence because, despite making more money, their lifestyle becomes MORE relatively expensive!
"More is always better" always applies, but the bigger the "more" the better, right? Relatively, to someone at my company contributing only 8% of their salary to their 401k, the "right now" impact goes from an increase of 2.98% to 2.84%. So what's the "right now" impact of the same raise if you max out your 401k?
Well, my 2.98% raise ACTUALLY gives me an additional "right now" impact of 5.32%! That's 53.38% MORE impact to my lifestyle than someone not contributing the max!
So what will I do with the extra "right now" cash? Well, I'm sure I'll take some of it and contribute it to my 2016 IRA to help me get closer to my yearly asset goal. With most of it, though, I'll probably invest it in myself. I really want to get my side-projects off the ground so that I'm not tied to my JOB. After all, if I'm in charge of the cash flow, I can give myself a raise any time I want! 😀
Readers, how would you use a raise? Would you put it towards improving the quality of your life right now or towards creating a better tomorrow?