There are few things in life that deserve a glass of champagne more than a well-earned promotion. After years of blood, sweat, and tears, your company has finally recognized your efforts and decided to move you into a more meaningful role within your company. Sometimes, only title are associated with these promotions, but more often than not there will be financial rewards as well. This is exactly your time to fall into the lifestyle inflation trap and make some really smart financial moves that will pay dividends down the road.
- The Pay Raise- Generally, a new promotion will also mean more responsibility which often equals more pay. If your salary jumps by $10,000 or even $50,000 dollars this will mean a significant bump in your cash flow for your family. What should you do with this money? Is it best to add to your 401(k)? Start paying down the mortgage? Or time to purchase that new vacation home? With pay raises and bonuses, people often don’t deploy the important rule of 1/3rds. What this means is that at least 1/3rd of the raises and bonuses should be captured immediately with some form of forced savings. This should be priority number one.
- Tax Planning- After all of the excitement subsides from the new title or even the new office, you should begin to ask yourself if a new tax planning strategy should tax effect. Did you now fall into a new tax bracket with this additional income? Is it time to readjust your withholdings for each paycheck so you don’t get stung during tax season? Did you trigger additional Medicare tax or the Obamacare surtax? Will your itemized deductions and personal exemptions start to phase out now? All of these should be considered along with the appropriate tax mitigation strategies so you can keep as much as possible from this hard earned pay raise.
- Stock Options and/or Restricted Stock- If you hit a magical band level in your company, you may now be eligible for non-qualified stock options, incentive stock options, performance units, or restricted stock. These programs vary in how you can financially benefit from a rise in price or overall performance of your company and should come under much scrutinization. I’m always baffled at how people who get this stock spend more time getting advice from the office next store than a qualified professional. It is paramount that you put a disciplined strategy in place with these types of programs to grow your overall financial success. Should you cash in right away? Should you sell every year? Should you use limit orders? You may have even qualified for a deferred compensation plan if your company offers it to certain level of executives.
You should be proud of yourself for getting promoted. For most of you, it will mean another three to five year stint in a different part of the company, a different part of the country, or even learning a different skill set altogether. Now is the time to make smart money moves to set yourself up to make work optional one day in the future. Schedule/Call me for a "Quick Chat" if you would like to talk about your options.