It's that time of year when I'm seeing a lot of promotions in my LinkedIn feed. If you're one of those lucky people, congratulations! Often, getting a promotion comes with a higher salary, a bigger bonus, a different compensation schedule, or other benefits like RSUs, stock options, and deferred compensation plans. It's a lot to digest at a time when you're busy trying to learn your new responsibilities. Check out my tips below for making this financial transition easier and taking advantage of this opportunity to improve your finances.
Understand your new compensation package
Are you now being given additional compensation components like RSUs, options, or a deferred compensation plan? You may be asked to make decisions when you don't even know what an RSU is. There are usually three areas where questions come up that can impact your finances:
- How much money are you taking home - some compensation structures don't have any effect on your monthly income, some like a deferred compensation plan can actually lower it.
- How does this affect your taxes - will you need to adjust your withholding, how will more income affect your tax return, will you need to make decisions on buying/selling stock and incurring short or long term capital gains?
- How should you balance short and long term considerations - does it make sense to give up guaranteed money now for longer-term upside when you're making salary + commissions, or do you have to make decisions surrounding stock options?
The key to making the right decisions is to understand the changes to your compensation and get help when you have questions. Visiting a fee-only financial planner who can work on an hourly basis may help here.
Update your budget
After you've given yourself a quick financial treat, sit back and take stock of your budget. If you're making more money, you may now have room for some of those financial tasks that have taken a back seat until now. You'll feel better about your finances when you think about these items:
- Right-size your emergency fund - consider putting away 3-6 months worth of expenses to gain peace of mind
- Pay down debt - extra income can allow you to make larger payments on student loans, credit cards, and car loans
- Increase retirement plan contributions - make sure you're receiving the full match on your company sponsored plan, then shoot for saving 10-15% of your income
- Save for shorter term goals like a house downpayment or travel - set aside money for these goals into a specific account and set up automatic transfers so they continue to grow
- Save for longer term goals like kids' college - consider if now is the time to open an account specifically for education to take advantage of tax-savings opportunities
- Think about protecting your family by using insurance and updating your estate plan - they may depend on your income now more than ever, and you need to plan for them if something happened to you
Evaluate your lifestyle
One of the biggest mistakes I see people making when they get a promotion is giving themselves a corresponding lifestyle promotion. Even if you're committed to keeping a lid on your lifestyle, often there are changes in your job that require you to spend more money at home like an increased travel schedule, professional dress requirements, or just less time to take care of personal tasks. Keep an eye on these items and spend your money where it makes the most bang for your buck:
- Don't go buy a new house - this shouldn't be the first thing you do when you get a promotion. Beyond the fact that moving is a hugely stressful activity you don't have the mental bandwidth for right now, a higher mortgage will increase the pressure you're under and can wreck all the progress that a higher income meant for your budget.
- Carefully evaluate new cars, wardrobes, and other impulse purchases - above I mentioned giving yourself a quick financial treat, that's okay but it shouldn't be the new norm. New job responsibilities often bring about additional stress and some people compensate for that by spending. Be realistic with yourself about why you spend and think about focusing on areas that are likely to bring about happiness.
- Consider adding some outsourcing to your life - if your promotion now means you're working more, you may need to think about services that can do your shopping, laundry, cleaning, and home maintenance for you. This can be money well-spent if you don't enjoy these tasks and want to spend your time on more meaningful activities with family or friends.
Reach out for help. You don't have to do this all alone. Consider booking a complimentary consultation to see if now is the right time to get your finances in order!