I Just Got a Raise, Now What? | A Financial Advisor’s Playbook

For many people, a new job, promotion, raise, bonus, or even a big drop in expenses (like finally paying off a car or student loan) feels like a green light to spend. The paycheck goes up, but there’s rarely a deliberate conversation about what to do with that extra income, so it quietly disappears into nicer dinners, more subscriptions, upgraded cars, and impulse purchases. When these opportunities arise, it is more than a bigger paycheck; it’s a chance to permanently change your financial life for the better. Handled well, one increase in income can significantly accelerate your progress toward retirement, debt freedom, and other major goals. Handled poorly, it can disappear into higher monthly bills and “lifestyle creep” that quietly eats your financial future.

Below is how I’d coach a client who just received an increase in salary to understand the tax impact, update the budget, avoid lifestyle creep, and put the extra dollars to work on your goals.

The Playbook

Step 1: Understand the Tax Implications of Your Raise

Before you celebrate the full number on your offer letter, remember that your raise is subject to federal, state, and payroll taxes, and only part of it becomes true take‑home pay.

The U.S. uses a progressive tax system, which means your raise can push part of your income into a higher marginal bracket, but it does not retroactively tax all of your income at that higher rate.¹ If a portion of your compensation is in bonuses or equity, short‑term capital gains (held one year or less) are taxed at your ordinary income rate, while long‑term gains benefit from generally lower capital gains rates.²

Action step: Estimate your new after‑tax income using current tax brackets and calculators, then plan around your net pay, not your gross. You may also want to consider speaking with a tax professional to better understand your options.

Step 2: Redesign Your Budget Around Your New Income

A raise is the ideal moment to rebuild your budget with intention instead of letting your spending drift upward. If you don't currently utilize a budget, this is a great time to build one.

A widely cited framework is the 50/30/20 rule: 50% of take‑home pay for needs, 30% for wants, and 20% for savings and debt repayment.³ Vanguard’s research suggests that saving between roughly 12% and 15% of income over a full career, including employer contributions, is often necessary to maintain your lifestyle in retirement.⁴ Fidelity also offers retirement “age‑based” benchmarks, such as aiming to have about 1× your salary saved by age 30, 3× by 40, and 6× by 50.⁵ For your safety net, large financial institutions typically recommend keeping about three to six months’ worth of essential expenses in an emergency fund, with some suggesting more for single‑income or higher‑risk households.⁶ Everyone's financial situation is different, so it is important to use these as a guide instead of a hard and fast rule.

Action step: Decide on a target savings percentage (for example, 15%–20% of gross income including your employer match), and increase your automatic transfers or payroll contributions as soon as your new paycheck hits. If you don't see the money entering your bank account, you are less likely to spend it frivolously. 

Step 3: Use Your Raise to Supercharge Long‑Term Goals

Once you know the after‑tax amount of your raise and have a budget framework, direct the extra income toward the goals that move the needle most.

Many employer plans match a portion of your contributions. Not contributing enough to get the full match is often described as “leaving free money on the table.” Vanguard’s analysis has found that a meaningful share of workers still fail to contribute enough to capture the full employer match available to them.⁷

Credit card interest rates have often been in the mid‑teens to low‑20s in percentage terms in recent years, according to Federal Reserve data, which means paying down high‑interest balances with your raise can deliver a powerful, risk‑free return.⁸

Action step: Assign specific percentages of your raise to retirement savings, emergency funds, debt payoff, etc. and automate those allocations through your employer plan and your bank.

Step 4: Recognize and Avoid Lifestyle Creep

Lifestyle creep happens when rising income quietly turns into rising expenses, often in the form of non‑essential upgrades like fancier housing, frequent dining out, or premium services. Over time, former luxuries start to feel like necessities, and the new money that could have gone to debt payoff, investing, or building an emergency fund gets locked into a permanently higher cost of living instead.⁹ This may lead to savings staying stagnant or even suffering from increased spending. 

Forbes and CNBC frequently warn that lifestyle inflation can cause higher earners to still feel “paycheck to paycheck” as increased costs are in step with each raise.¹⁰ Surveys cited by large asset managers show that many households report financial stress and difficulty saving, even at middle‑ and higher‑income levels, in part because of rising fixed expenses and lifestyle creep.¹¹ Major retirement providers emphasize the “pay yourself first” approach. Routing money automatically to savings, investments and debt payoff allows for greater consistency which often leads to better budget adherence.⁵ 

Action step: Before you upgrade anything about your lifestyle, decide how much of your raise you will never see in checking because it goes directly to long‑term goals through automatic contributions. 

Step 5: Build Systems, Not Willpower

The most successful savers rely on systems rather than constant self‑control. 

Behavioral finance research highlighted by Vanguard and others shows that automatic 401(k) enrollment and auto‑increase (auto‑escalation) features materially boost participation and savings rates over time. Many large 401(k) plans now default new employees into auto‑escalation, increasing their contribution rate by 1 percentage point per year, because small, automatic changes are easier for people to accept than one‑time, large jumps.¹² Another way to implement incremental changes is to allocate half of every raise to savings. This allows you to steadily increase your savings rate without feeling like you are sacrificing every pay bump.

Action step: Determine what percentage of your raise should be used for savings and how much should go to purchases or subscriptions that actually make your life better in the now. Put systems in place to move all savings automatically. 

A Quick Summary of Steps You Can Take

If I were advising you one‑on‑one, I would encourage you to:

1. Estimate your new after‑tax income and confirm your marginal tax bracket so you know what you’re truly working with.

2. Decide in advance how much of your raise goes to retirement, debt, emergency savings, and lifestyle, using a structure that moves you toward the 12%–15%+ long‑term savings range and toward key retirement‑savings milestones by age.

3. Automate your plan immediately. Use tools offered through your employer plan and your bank.

Handled with intention, your raise can be the moment your finances shift from “getting by” to building lasting wealth.

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Sources

1. TurboTax / Intuit, “What Is a Progressive Tax System?” TurboTax, 2023.
2. Investopedia, “Capital Gains Tax Explained,” updated 2023.
3. Investopedia, “The 50/30/20 Budget Rule Explained,” updated 2023.
4. Vanguard, “How America Saves 2024,” Vanguard, 2024.
5. Fidelity Viewpoints, “How Much Should I Save for Retirement?” Fidelity Investments, updated 2024.
6. Fidelity Learn, “How Much Should I Keep in an Emergency Fund?” Fidelity Investments, 2023.
7. Vanguard, “How America Saves 2024,” Vanguard, 2024.
8. Board of Governors of the Federal Reserve System, “Consumer Credit – G.19,” revolving credit and credit card interest rate data, 2023–2024.
9. Business Insider, Understanding and Avoiding Lifestyle Creep: Tips and Strategies, 2024.
10. Jack Kelly, “Lifestyle Creep Is Quietly Sabotaging Your Financial Future,” Forbes, August 10, 2021.
11. John Hancock Retirement, “2023 Financial Stress Survey: How Financial Stress Affects Workers and Employers,” John Hancock, 2023.
12. Vanguard, “Automatic Enrollment: The Power of the Default,” Vanguard, 2023.