Handling a substantial salary increase - suggestions?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
BigMoneyNoWhammies
Posts: 220
Joined: Tue Jul 11, 2017 11:58 am

Handling a substantial salary increase - suggestions?

Post by BigMoneyNoWhammies » Thu Oct 17, 2019 3:13 pm

Long story short, I'm a current US federal employee who will soon begin a private sector job that triples my current salary into the 160-170k range depending on annual bonus. For those of you with substantial incomes now or who have experienced large raises in the past, what are some issues such a large % increase in salary raises that you wish you had considered/known then that you know now? My initial thoughts are to increase my savings rate substantially by maxing out all tax advantaged accounts (something I was not in a financial position to do until now), pay off all existing debt (a few hundred dollars in CC balances, the remainder of an auto loan - approximately 7k), and do my best to avoid any serious lifestyle creep. Any other suggestions for someone suddenly in this position? No major debt issues or substantial expected expenses on my end to earmark $ for.

User avatar
RickBoglehead
Posts: 4887
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Handling a substantial salary increase - suggestions?

Post by RickBoglehead » Thu Oct 17, 2019 3:20 pm

Avoiding significant lifestyle creep is key. Got a big bump (not as big as yours) in 1994. Never spent more than that in a year despite earning many times that in future years.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

CeeKay1729
Posts: 22
Joined: Thu Aug 27, 2015 1:12 am

Re: Handling a substantial salary increase - suggestions?

Post by CeeKay1729 » Thu Oct 17, 2019 3:26 pm

Set up a auto transfer (in the same amount as your pay increase) from your account that receives your paycheck to a savings account in another bank and "forget" you got a pay bump. If you never see the money, you are less likely to spend. Saving money and lifestyle creep is 90% psychological.

User avatar
sk2101
Posts: 386
Joined: Sun Jun 02, 2013 4:54 pm

Re: Handling a substantial salary increase - suggestions?

Post by sk2101 » Thu Oct 17, 2019 3:31 pm

Live as if you were still making your old salary. Max out tax deferred accounts and set up automatic contributions to your investment accounts with whatever its additional. While you have outstanding debt, direct part of those contributions to pay them down.

Atilla
Posts: 1390
Joined: Tue Feb 09, 2010 7:44 pm

Re: Handling a substantial salary increase - suggestions?

Post by Atilla » Thu Oct 17, 2019 3:39 pm

Make sure your withholding is sufficient to avoid a huge hit at tax time. Tripling your salary to the $170k range brings you into the company of people actually paying significant income taxes.
Moderator Warning-Free Since 2017.

student
Posts: 4141
Joined: Fri Apr 03, 2015 6:58 am

Re: Handling a substantial salary increase - suggestions?

Post by student » Thu Oct 17, 2019 3:52 pm

Maintain your current lifestyle for a year and then reevaluate.

shess
Posts: 262
Joined: Wed May 17, 2017 12:02 am

Re: Handling a substantial salary increase - suggestions?

Post by shess » Thu Oct 17, 2019 4:14 pm

Hey, I'll tack against the tide!

I'd say to peel off at least a couple grand for some nice "treats". Buying an expensive car or house will result in lifestyle creep because you have to support those on an ongoing basis, but taking a weekend to travel and experience something interesting need not lead to lifestyle creep. If I had set aside more current rewards for myself while I was working instead of always focussing on saving for the long term, I likely wouldn't have burned out and would still be working.

ESPECIALLY if you have a spouse who's been there for you while working to this end.

Broken Man 1999
Posts: 3459
Joined: Wed Apr 08, 2015 11:31 am

Re: Handling a substantial salary increase - suggestions?

Post by Broken Man 1999 » Thu Oct 17, 2019 4:23 pm

Do everything mentioned above, BUT treat yourself to something nice as well. You have earned it by killing it with your new salary.

BTW, I'm not suggesting a new car, truck, or boat, more like a really great dining experience with a significant other, or a close personal friend. Maybe a weekend trip, things you pay for immediately, but have no lingering financial costs.

DW and I did that frequently, we rewarded ourselves when finances improved, and jacked up the investments/savings. We always paid ourselves first, so avoided the lifestyle creep for the most part. You don't miss $$$ you never have your hands on, worked well for us.

At any rate, congrats! :sharebeer

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

User avatar
Stinky
Posts: 2445
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Handling a substantial salary increase - suggestions?

Post by Stinky » Thu Oct 17, 2019 5:12 pm

Max out tax-favored savings, pay down debt, avoid lifestyle creep, etc. Plow additional free cash into an adequate emergency fund, and put any remainder into regular investment accounts.

Make sure that you're having enough withheld for taxes. Hopefully your tax withholding will automatically adjust, but check to make sure.

You also now have more room for two types of things that will enhance your enjoyment of life. First, give yourself the occasional additional "treat". Second, consider increasing your charitable giving, whether it be to your church, alma mater, or other favored charity. We've always gotten a warm feeling from supporting charities that we believe in.

Congratulations to you. It sounds like your new employer will be really recognizing the contribution that you can make to the firm!
It's a GREAT day to be alive - Travis Tritt

BeneIRA
Posts: 683
Joined: Sat Nov 29, 2014 8:43 pm

Re: Handling a substantial salary increase - suggestions?

Post by BeneIRA » Thu Oct 17, 2019 5:50 pm

It's very hard to avoid lifestyle creep. Very hard. Increase your automatic savings, 401k, IRA, etc. It will force you to live on the smaller amount and you don't see the excess. Set aside an extra amount you feel comfortable with and that can be your fun money. Keeping a budget and tracking expenses is also helpful. You can deny the lifestyle creep, but if you see it on a spreadsheet how much you're spending, you can't deny it. Best of luck.

User avatar
mrspock
Posts: 528
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Handling a substantial salary increase - suggestions?

Post by mrspock » Thu Oct 17, 2019 6:01 pm

RickBoglehead wrote:
Thu Oct 17, 2019 3:20 pm
Avoiding significant lifestyle creep is key. Got a big bump (not as big as yours) in 1994. Never spent more than that in a year despite earning many times that in future years.
This. This is your chance to buy your own future and freedom ... don’t squander it with lifestyle creep. Every raise, every bonus, every RSU grant .... they go right to my savings. Once I am FI... I’ll allow lifestyle creep in proportion to what my nest egg can support in retirement.

Beyond this:
- max out 401k
- learn about Roth back doors (including mega)
- setup taxable account for overflow
- track spending with mint or similar... data is critical to prevent lifestyle creep or at least control it
- review your spending monthly to keep yourself honest
- automate savings ... don’t have it sit in your checking account — you will spend it or make up some excuse why it’s “ok”
- CCs put on autopay — 0 reason you can’t do this at high salaries

averagelonghorn
Posts: 33
Joined: Sun Aug 26, 2018 8:26 pm

Re: Handling a substantial salary increase - suggestions?

Post by averagelonghorn » Thu Oct 17, 2019 6:14 pm

All good advice above, including some splurge that's a one time expense... my personal preference would be a nice vacation somewhere down the line, or now if your current savings allow and you can do it before starting the new position.

I had a double in salary in my mid-30s; I wish I had used the opportunity to max all tax advantaged space and up after-tax saving a bit. (I did increase it a bit, but in hindsight 15 years later, wish I had done more.)

So your plan in your OP is for sure a good starting point. Max all tax deferred, and keep up as those max deferrals rise. If your emergency fund is short, build that up, too.

Being a month ahead in your bills rather than a month behind is life changing to financial stress level; start there if this applies to you.

A (might even say very) little lifestyle creep after a tripling of salary is ok, a lot of lifestyle creep is a recipe to always be behind, possibly by an ever increasing amount.

Oh and for sure, wipe out that credit card debt and never let it build again; do that with your first paycheck at new job, if not before that.

User avatar
ram
Posts: 1330
Joined: Tue Jan 01, 2008 10:47 pm
Location: Midwest

Re: Handling a substantial salary increase - suggestions?

Post by ram » Thu Oct 17, 2019 6:55 pm

My salary went up by more than 4 times when I transitioned from a trainee physician (fellow) to a real doctor (attending physician).

Suggest:
- Taxes will go up substantially. No choice there. But withhold appropriately.Take a look at the tax rates.
- Increase expenses by 50%
- Save the rest. It would be a >200% increase in savings.
Ram

User avatar
Elsebet
Posts: 778
Joined: Mon Feb 08, 2016 2:28 pm
Location: Washington state

Re: Handling a substantial salary increase - suggestions?

Post by Elsebet » Thu Oct 17, 2019 6:57 pm

With my recent job change and salary increase my taxes went up dramatically (the tax reforms didn't help either) but the extra income lowered my mortgage debt and continues to do so. I did not increase my lifestyle a bit.
"...the man who adapts himself to his slender means and makes himself wealthy on a little sum, is the truly rich man..." ~Seneca

bling
Posts: 362
Joined: Sat Jan 21, 2012 12:49 pm

Re: Handling a substantial salary increase - suggestions?

Post by bling » Thu Oct 17, 2019 10:07 pm

you'll get a pretty awesome adrenaline rush the 1st time you get your new paycheck, but it wears off pretty quickly after a couple.

and to reiterate others, control lifestyle creep and increase your savings rate, but you should also splurge from time to time to enjoy your higher income.

mottooscillator
Posts: 45
Joined: Wed Jul 17, 2019 11:14 pm

Re: Handling a substantial salary increase - suggestions?

Post by mottooscillator » Thu Oct 17, 2019 10:35 pm

I had a similar experience when I doubled my comp from around $500k to nearly $1M. The main benefit to me has been a massive increase in my savings rate. The increased comp and benefits and newcompany made me learn more about tax advantaged accounts and brought to bogleheads.

User avatar
AerialWombat
Posts: 879
Joined: Tue May 29, 2018 1:07 pm

Re: Handling a substantial salary increase - suggestions?

Post by AerialWombat » Thu Oct 17, 2019 11:03 pm

My net income doubled each year for the previous four years. It’s a shock to the system if you’re not prepared for it.

Since you’re coming from a .gov job, spend some time familiarizing yourself with every available retirement account option you now have. Understand your 401k plan and fund choices, your HSA availability, etc.

Definitely rid yourself of any non-mortgage debt, and decide if being mortgage-free matters to you or not.

Lastly, don’t forget to enjoy it. I struggle with this part in some ways, and not in others. For example, I only fly first class domestically now, but I can’t bring myself to “waste money” on furniture (most rooms in my house are empty, and I sit on a folding camp chair in my living room). So splurge a little bit, and enjoy the money. ‘Cuz YOLO.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

SDLinguist
Posts: 132
Joined: Wed Jan 31, 2018 2:39 pm

Re: Handling a substantial salary increase - suggestions?

Post by SDLinguist » Fri Oct 18, 2019 12:07 am

The Boglehead philosophy isn't to be a miser living on top ramen in a shoe box while making lots of money so you can retire in your 40s and continue to live on top ramen in a shoebox for 40 years until you die in your 80s. It is to live below your means so that you can secure your financial situation and in turn use your money to do the things you want to do.

As others have said, you can now pay yourself. Max all the available retirement accounts you have and pay yourself. Even with maxing out 401k, Roth, HSA and withholding taxes you will probably have more left over in your paycheck than you had before. The big issue is how close you are to retirement.

If you are 30 and have 25-30 years ahead a little lifestyle creep, especially if your job and field are fairly stable, is allowed and probably a good thing. You are being payed well and you should reap some of that reward, not in excess but you should be able to utilize the fruits of your labor.

If you are in your mid 50's then you don't have too as much time left to save, relatively speaking, so for each new dollar of spending you add now you need to save more dollars to have enough to continue your new spending level in retirement.

You should probably pick a target amount you want to save. If you are young 25-30% of gross should be easily doable at 160k. That is around 40-50k. Even with a hefty tax bill of 30k a year that leaves you with more than your old job was paying you.

If you are older then you probably don't want to increase your yearly spend too much. You realistically need an additional 250-350k saved for retirement for each 10k in extra spending depending on assumed SWR.

User avatar
HomerJ
Posts: 13401
Joined: Fri Jun 06, 2008 12:50 pm

Re: Handling a substantial salary increase - suggestions?

Post by HomerJ » Fri Oct 18, 2019 12:32 am

BigMoneyNoWhammies wrote:
Thu Oct 17, 2019 3:13 pm
My initial thoughts are to increase my savings rate substantially by maxing out all tax advantaged accounts (something I was not in a financial position to do until now), pay off all existing debt (a few hundred dollars in CC balances, the remainder of an auto loan - approximately 7k), and do my best to avoid any serious lifestyle creep.
You are an extremely smart person.

The trick to becoming rich is NOT increasing lifestyle as fast as your salary.. That's it.

Many people, if they get a $10,000 raise, increase their spending $10,000. Some increase it $15,000, figuring they'll pay off the credit debt when they get their NEXT raise.

The top 5% are the smart ones who get a $10,000 raise, and only raise their spending by $5000 and save the other $5000.

It doesn't take too many raises like that to start saving serious money. If you're REALLY lucky, you'll realize at some point, you don't need to spend any more to be happy, and you can save 100% of your raises from then on.

In your case, you can increase your spending a bit, but save most of it, and you'll be financially independent in no time.
The J stands for Jay

User avatar
lthenderson
Posts: 4360
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: Handling a substantial salary increase - suggestions?

Post by lthenderson » Fri Oct 18, 2019 2:39 am

Besides maxing out savings and resisting lifestyle creep, we increased our charitable givings. This has provided rewards in other ways.

Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: Handling a substantial salary increase - suggestions?

Post by Bacchus01 » Fri Oct 18, 2019 6:10 am

You aren’t there on your own, but if you have more household income start looking at some taxes that kick in over $250k and find ways to avoid them (401k, deferred comp, HSA, etc)

Jack FFR1846
Posts: 10454
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Handling a substantial salary increase - suggestions?

Post by Jack FFR1846 » Fri Oct 18, 2019 7:17 am

Before you even receive your first paycheck, start setting up automatic deductions so that you don't actually receive any higher take home. Of course, set 401k/403b type deductions for max/# of pay periods. Perhaps with hold a bit more than needed for taxes (yes, I know it's a free loan to the government). Send whatever is left in order to keep take home equal to your taxable account for auto investing.
Bogle: Smart Beta is stupid

Leemiller
Posts: 1253
Joined: Sat Jun 01, 2013 12:42 pm

Re: Handling a substantial salary increase - suggestions?

Post by Leemiller » Fri Oct 18, 2019 7:48 am

I’m a former Fed who received a large increase to go private (although not as large as yours!). One thing I’ve done is set aside a certain amount annually in a taxable account as a substitute for the guaranteed pension I gave up. In my household we’ve increased auto & vacation spending primarily, with some shopping, and since all of that is discretionary, we can dial it back if necessary. If you’re an ex Fed some wardrobe shopping may be in order - trust me you don’t want to look like a gov’t employee as your first impression (and again I’m an ex-Fed).

Going private has worked out extremely well for me. I was promoted in under a year and am now getting headhunting calls for salaries I only dreamed of. I wish you the best of luck in your new position.

MikeG62
Posts: 2239
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Handling a substantial salary increase - suggestions?

Post by MikeG62 » Fri Oct 18, 2019 7:48 am

RickBoglehead wrote:
Thu Oct 17, 2019 3:20 pm
Avoiding significant lifestyle creep is key.
+1. Everything flows off of this.
Real Knowledge Comes Only From Experience

stoptothink
Posts: 6506
Joined: Fri Dec 31, 2010 9:53 am

Re: Handling a substantial salary increase - suggestions?

Post by stoptothink » Fri Oct 18, 2019 8:22 am

My wife's income has quadrupled in the past 4yrs, to be fair she was making ~$14hr 4yrs ago. In the same time period mine has gone up ~50%. We are saving significantly more, but as far as lifestyle, it hardly changed. Just automate everything and you'll never notice.

CAP_theorem
Posts: 68
Joined: Tue Aug 12, 2014 10:19 am

Re: Handling a substantial salary increase - suggestions?

Post by CAP_theorem » Fri Oct 18, 2019 10:13 pm

What I did before I really hit my stride was to spend 10-20% of any meaningful salary increase once on whatever I wanted. No lifestyle changes for 13 years.

This is just a one time spend. Subsequent years the additional income all goes into retirement savings or house acquisition money.

Eventually I made enough that I did change my lifestyle in some big ways because it was foolish to not live a little, but that was at a level of income few people ever reach.

I had a financial target to hit at age 45, and once I was on track to blow that target out of the water I started to re-evaluate my relationship with saving.

Nathan Drake
Posts: 459
Joined: Mon Apr 11, 2011 12:28 am

Re: Handling a substantial salary increase - suggestions?

Post by Nathan Drake » Fri Oct 18, 2019 11:52 pm

mottooscillator wrote:
Thu Oct 17, 2019 10:35 pm
I had a similar experience when I doubled my comp from around $500k to nearly $1M. The main benefit to me has been a massive increase in my savings rate. The increased comp and benefits and newcompany made me learn more about tax advantaged accounts and brought
Similar

But not similar

/Franco

Topic Author
BigMoneyNoWhammies
Posts: 220
Joined: Tue Jul 11, 2017 11:58 am

Re: Handling a substantial salary increase - suggestions?

Post by BigMoneyNoWhammies » Mon Oct 21, 2019 3:10 pm

Lots of good advice and anecdotes in response to take into consideration, thank you all.

Post Reply