Got a Raise?
Don't Just Blow It; Make the Most of It
When my girlfriend, Connie, came complaining to me about not having had a raise in two years, I suggested she ask for one. Well, she did. (Seems simple enough doesn't it?) And she got her raise.
Now Con is faced with a whole new set of challenges: More tax. More cash flow. More guilt about not having established a retirement plan. Connie has hit the ripe old age of thirty-something when a girl gets to thinking about her future, so she wants to know what she should be doing with the money.
What did you do with your last raise? Bet it just flowed into the bank, and flowed out again, on lunches, new shoes or theatre tickets. Hey, that's not all bad. Having fun is a part of life. And since we all work hard, we deserve the small treats we give ourselves. The thing about money, though, is that as much of it as we have we can spend. And often the only way to not spend it all is to hide it from ourselves.
What will you do with your next raise? Here are five ideas that won't take all the fun out of having a little more cash flow, but will put at least part of your new-found wealth to good use for the future.
It's too much to ask most people to take their raise and bank it. But how would you warm to the idea of saving half? That's not quite so bad, is it? With Connie's $400 a month, if she saved half from now until she retired and earned just 9 percent return, she'd accumulate over $440,000 by the time she turned 65. That works out to $76,800 in savings and over $363,000 in pre-tax compound return. Now, doesn't that seem like a worthwhile compromise?
Beef Up Your RRSP
If you took that $200 and stuck it in an RRSP, not only would you not have to worry about paying tax on your return until you pulled the money out during retirement, but you'd also end up saving on your taxes. A $2,400 a year contribution to an RRSP at a marginal tax rate - the rate of tax you pay on the last dollar you earn - of 33 percent will net you a tax saving of $792. You can use your tax refund to fund other savings, take a trip or buy something completely luxurious. After all, at this point, it's the tax-man's money you're spending, right?
Speaking of Taxes
When your boss announces your raise, be careful not to count your chicks too quickly. It's easy to look at an eight percent increase and think, "Neat, $400 more a month." But that's $400 gross, my dear, and the tax man is gonna want his share.
There are ways to reduce the amount of tax deducted at source, particularly if you go to school part-time, pay for child-care or are caring for a dependant who is 18 or older. The trick here, if you haven't already done so, is to adjust your Personal Tax Credits Return form, which you completed for your employer so that less tax is deducted at source. By doing so you don't end up giving an interest free loan to the government - everyone else calls this a "tax refund."
Debt by Any Name
Of course, saving all or part of your raise only makes sense if you're not carrying any debt. If you have a balance on your credit card (yes, I'm talking about that store credit card too), if you've drawn on your line of credit, if you've got a loan outstanding for your car, if you're still in hock for your education or if you're still paying off a consolidation loan taken to correct past fiscal misjudgements, your first priority should be to pay those off.
Make a deal with yourself: "Self, I'm gonna plough my entire raise into my credit cards for the next eight months. Once they're paid off, I'm gonna buy myself (fill in your desire here) and pay for it with cash!"
The yuckiest thing about paying interest is that it's costing you way more than you think. If you're carrying a balance of just $2,500 on your credit cards, and paying 17 percent interest, that's costing you $425 a year in after-tax dollars. So you're working really hard to support the taxman and the credit card company, but you're doing yourself a huge disservice.
Take Care of the Details
There may be a bunch of financial details you've been avoiding because you convinced yourself you couldn't come up with the cash.
Making a will may cost you a couple month's worth of your raise. Getting disability insurance will make sense with your increased cash flow. Or perhaps you'll want to use part of your new income to begin contributing to a Registered Education Savings Plan or in-trust account for your children's future education.
If you've been using the excuse of not having enough money to do something you know you should, now's the time to face up and make some progress on your Things-I-Just-Must-Do list.
A new raise is a great opportunity to fix what's broke, be it your lack of insurance, your under-funded retirement plan, or your over-utilized credit. But it's not going to happen by itself. Incorporate your raise into your cash flow even for a couple of weeks, and in no time flat it'll be part of your expenses. Make some plans for putting it to good use today, and you'll have a lot to show for your good judgement in the future.