Last Updated on 15 May 2021 by Dan
Hello everyone! There’s few things better than getting a raise or promotion at work. Not only does it mean more money coming in through the door, it’s also a sign that your work has been recognised and that fact is a huge source of personal fulfilment.
Today’s post is about a series of financial actions I’d recommend if you find yourself in this happy position!
The Psychological Impact of a Promotion or Raise
I’d like to talk a little bit further about how these actions are designed to boost long-term happiness. Some of the below are simply good old-fashioned financial advice but I’ve tried to incorporate the principles of positive psychology into the review.
The idea behind this school of thought is that receiving a raise or promotion often results in a temporary burst of feeling that life has improved, however we simply return to a base level of happiness pretty quickly after that initial rush.
Therefore, we should focus on actions that can provide improving that “baseline” average happiness longer term, rather than the quick burst.
Actions to take after a Promotion or Raise:
Settle any non-mortgage debts
If you have any form of debt which is costing you money to maintain (credit cards are the classic example) then use this as an opportunity to get it paid off (or to commit to set aside money from your raise to pay off as quickly as you can).
You’ll be grateful for this longer term – the amount that it costs to maintain debts like this is significant over time (we explain why in our article on why not to pay the minimum credit card payment) – by clearing it out you will effectively get a further raise and get a burst of happiness all over again!
Treat yo’ self!
A money blogger is always going to tell you to do the debts first, but after those are settled then do remember to treat yourself to something you’ve wanted for a while!
A step up is a big milestone to be celebrated after all and contrary to popular belief we sit Scrooge McDuck style on our mountains of gold, most money bloggers do recognise a treat spend in moderation can be good for the soul.
So do celebrate, you’ve literally earned it!
Review what you pay into your pension
Not saving for retirement through paying enough into a pension is a very easy financial mistake to make – the pressures of the now often end up trumping what we know is something good for us.
The moment you’ve had that step up and before you’ve got “used” to your new salary and your lifestyle has potentially expanded to use it is an excellent time to review what’s going into your pension.
Money writers bang on about your pension because whilst the benefits are long term:
A) Pensioner poverty and the need for care services is unfortunately a very real thing, and most people really underestimate this.
B) The tax advantages of saving really are significant, and a pension is the best vehicle for saving in.
The reason for this is the tax relief that is given as you pay in (up to certain limits). You’ll get the income tax you would have paid on your contribution back as extra – so if you’re a basic rate taxpayer that’s an extra 20% on top.
If your raise or promotion takes you into being a higher rate taxpayer it becomes even more important, as it’s a save of 40%.
Other investments are good and can be more flexible, but this tax wrapper really makes a pension very hard to beat.
Check your emergency fund balance
I know…..I know – it’s a money blogger staple. And you might think “but I’ve just been promoted! My career is as secure as it’s ever been? Why do I need this now?
It’s simply a matter of not knowing what curveballs life will throw at you – and when you need it believe me, you’re very glad it’s there. So when you suddenly have a bit of extra money, it’s a good time to reinforce this.
There are different estimates of what people suggest is a good emergency fund, usually ranging from three to six months of salary.
My view is that depends how “shrinkable” your expenses are – do you simply have fixed costs like rent that can’t be changed, or do you have things in your life you could cut back on if you absolutely needed to?
A good emergency fund is about knowing what “survivability period” you would have before having to make more significant lifestyle changes like having to change house would be, and making sure you’re comfortable with that.
Even if you have an emergency fund, it’s also a good idea to plan out. sinking fund for larger planning fun stuff and remaining secure! More on a a sinking fund and how it differs from an emergency fund over at Money Savvy Mum.
Tracy at Mind over Money Matters has some great tips for how to trick yourself into saving money!
Check for Lifestyle Creep
There’s an old maxim about work that it “always expands to meet the time you have to do it”. Income and lifestyle work in an astonishingly similar way, something noted by Becky on her blog on ‘reasons why you never find you have enough money!’
As your salary rises, so does your mindset and some of those challenges which our poorer non-promoted selves might have done can slip away – and we find instead that our “spending increases to meet our salary!”
That usually comes from feeling a bit freer – we might normally have waited for a sale before buying a new item of clothing for example, but now buy it at full price.
Now let me be clear – if it adds to your life and you have the means it’s absolutely your freedom to do so. However, it’s worth continuing to actively challenge how much anything you’re buying adds to your life.
To do this it helps to have as much visualisation of whatever your big life plan is as much as possible. Might you want to retire a little earlier, take a few dream trips or move into that dream house?
I find reframing doing something against if it will help me achieve those much bigger objectives that I think will have more payoffs a useful exercise, and it shouldn’t change when you get that kick up.
Use your ISA to save or invest
Yep – my favourite topic! A pension should come first as detailed above as it’s the most beneficial investment for a structural perspective owing to the tax save.
However if you have shorter term needs and are looking to save up some money, make sure it’s in an ISA wrapper. This is where the Government encourages you to save or invest by providing allowances where the gains are exempt from tax.
With this structure you can either save in per a standard bank account or invest in stocks and shares or “innovative finance.” First time buyers may also want to look at the Lifetime ISA which tops up any savings with a Government add on, but is subject to some eligibility requirements.
I’ve written a more comprehensive guide to the types of ISA which are available, how they work and what might be right for you here.
What did you do when you got a promotion or raise? Did you learn anything that might prove useful to our readership? Then please let us know in the comments below!
And that’s it!
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