What to do - and not do - with a raise or bonus

After years of treading water, more professionals, executives and senior-level managers are finally getting promotions in January – and bigger pay packages.

While the average pay raise in 2016 is projected to be 3 percent, those receiving a promotion will likely see double-digit increases in compensation, including bonuses and stock options. If you’re one of those people, it’s a huge financial opportunity to meet some of your short- and long-term financial goals.

But be careful. Some professionals celebrate by making a wildly expensive purchase that eats up a large chunk of their new paycheck, such as a shiny new car or moving to a larger house. One of my clients used a bonus to install a $75,000 swimming pool in her backyard. But the pool put a major dent in her goal to build her savings for her three children’s college education, which was right around the corner.

The key is to treat yourself within reason and still maximize your new financial opportunity. To make the most of your new compensation, here are some easy steps that anyone should take to make the most of your new riches:

— One of the best ways to save your big raise is to increase your pre-tax 401(k) contribution. To maximize this benefit, contribute $18,000 annually if you are under age 50 and $24,000 for those over age 50. If you weren’t already doing this, now is the time.

For people with access to a deferred compensation plan, you can defer an additional amount of your higher salary and bonus, saving even more in taxes. This tactic forces you to save – if you never see the extra cash in your checking account, you won’t start spending it.

— Next, consider setting up an automatic monthly deposit into certain investment accounts, such as college 529 plans. This move will help accumulate wealth over a long period by saving regularly. A 30-year-old needs to save half as much money over a career compared to someone who starts saving when they are 40 years old, assuming similar market returns on their portfolios.

— Third, start making extra monthly principal payments on your mortgage, credit cards, or other consumer debt. One of my clients is doing just this – after earning her big promotion last year she immediately took the extra income from her monthly paychecks and sent it directly to the mortgage company. As a result, she’ll be able to get out of debt at least five years sooner.

— There is one category where spending some of your new income makes financial sense – more insurance. A higher income means you need more life insurance to protect your family, and adding more disability insurance makes sense too. The higher your income, the more protection you may need if you suffer a serious illness or injury and can no longer work full-time.

Professionals and senior-level managers may also consider buying personal excess liability insurance. A new, higher profile job can increase the risk of a lawsuit; an excess liability policy can help protect your family’s assets should there be a future personal judgment against you.

Finally, a new promotion may provide access to new types of compensation and benefits plans, some which require a beneficiary designation (such as life insurance and retirement accounts). These new plans may have complex tax ramifications, so meet with your estate planning attorney and see if you need your wills or trust documents updated.

A promotion means more responsibility and longer hours. But make the most of your higher pay by focusing on your finances and increasing the returns on your money before time slips away.

Lisa Brown is a partner and wealth advisor at Brightworth, a financial planning and wealth management firm based in Atlanta with more than $1.2 billion in assets under management.

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