You earned a big raise, your side hustle took off, or you managed to find a great new job with an even greater new salary.
Now that you’ve got the big paycheck, what should you do with it?
This is a great problem to have, but it comes with it's own set of challenges.
Here are five money moves to make when you double your salary.
Ways Normal People Double Their Income
Have you recently doubled your income? If not, this article is still for you. It can help you prepare for a time in the not-so-distant future where you’re earning twice what you’re earning today. Sound like a pipe dream? I don’t think it has to be.
Here are a few ways that real people actually double their income:
- Move from part-time to full-time.
- Move to a part of the country that has more job opportunities.
- Change companies.
- Apply your skills in a new industry.
- Work with a career mentor to think through next steps.
- Switch to work as a self-employed consultant rather than as a full-time employee.
- Negotiate for a promotion and a raise.
- Change from a salaried position to a commission-based position.
- Work within a performance-based compensation structure.
- Your side business really takes off.
- Time (salaries may double over a few years rather than all at once).
I suspect that many people can double their salary over a five-year period if they make a career plan and work on it faithfully.
1. Review Your New Pay Stub
So you’ve got the coveted raise (maybe even doubled that salary) — what’s next? For at least the first two weeks you want to do nothing. You need an opportunity to review your new paycheck before you make any financial moves.
In some cases, a big raise can be somewhat eaten up by taxes, contributions to your 401(k), and other withholdings. In all likelihood, doubling your salary won’t double your take-home pay. So wait until you see the new paycheck before you go out to splurge.
2. Adjust Your Tax Withholdings
After you review your new pay stub, you may want to adjust your tax withholdings. You will do this by filling out a new W-4 form and submitting it to your HR or payroll department. While you may not need to fill out the new form, it’s worth using the free tool from the IRS to estimate your new withholdings.
If it looks like you’re withholding less than you need to (based on what you found in the previous step), now is the time to change. You don’t want to wind up with a huge tax bill next April.
3. Set Bills on Automatic Payments
With your new, higher income, you’ll have stronger cash flow. That should mean that it’s easier to pay all your bills on time and in full. So make that a reality by setting up all your bills (utilities, phone, rent or mortgage payments, student loans, and anything else you can automate) on automatic payments.
For me, having all my bills on automatic payments is my favorite financial luxury. Giving yourself the luxury of not having to juggle bills and pay days gives you a huge degree of financial freedom. Enjoy it!
One note on setting bills on auto payments: be sure that you’re still on top of your finances. Apps like Clarity Money, Mint, or You Need A Budget can help you track your spending and stay in budget without having to bother with the annoying details of actually paying bills.
4. Increase Retirement Contributions
While you need to pay the bills every month, you’ll also need to pay the bills during retirement. To make that a little easier, consider increasing your automatic retirement contributions now that you have a substantially higher salary.
If your employer offers a match on retirement contributions, contribute enough to earn that match. For example, your employer may offer a 0.5% match on the first 8% you contribute. By contributing the full 8%, you’re getting an immediate 50% return on your money, and that money can stay in your account to grow over time.
See if you can work towards maximizing your 401k contributions!
Once you’re capturing a match, decide whether you want to automatically deduct money from your paycheck (to go into a 401(k) or other workplace plan) or into an investment account you own (like a Roth IRA). No matter which route you choose, your future self will thank you for making prudent investments into your retirement.
5. Automatically Save for Something Awesome!
When you get a big raise, it’s easy to succumb to lifestyle inflation. Things like eating out, taking ride shares more often, and a few extra clicks when online shopping can eat away at your extra funds.
While it’s good to enjoy a few more conveniences now that you’re earning more, you probably have some bigger dreams too. For example, you may want to take an expensive trip to Slovenia, buy a dream car, upgrade to new furniture, or visit every ball park in America.
Whatever your dream, it probably involves the need for cash. So set up an auto-draft away from your primary checking account to a savings account that will fund a bigger purchase down the line.
Note: there are apps that can help you with automatic savings.
Bonus: Be Sure to Celebrate and Thank the People Who Helped You
Big money wins, like doubling your salary (or getting any big raise), don’t come along every day. Be sure to celebrate this victory by doing something that you’ll remember. Take your special someone on a date, dance in an elevator, take a friend out for lunch, or rent the paddle board when you hit the beach.
When it comes to celebrating, you do you.
Of course, it’s tough to achieve a huge income gain without some help along the way. Send a nice thank you note to career mentors, friends, your parents, your spouse, or siblings to let them know how they’ve helped you. You don’t have to brag, simply thank them for their support, and let them know how much they mean to you.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.