Author Topic: I got a big raise! ... Now what?  (Read 7919 times)

KHud1981

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I got a big raise! ... Now what?
« on: November 19, 2014, 09:35:22 PM »
Last week, I was informed that my general awesomeness at work is resulting in a move to a supervisor position and a big raise (almost 20%)! Yay!

Coincidentally, our annual 401k review meeting was the next day. I took the opportunity to bump up my contribution from 10% to 15%. Ideally, the raise and the increased contribution will apply on the same paycheck and Iíll just see a slight increase in my take-home pay.

So, how should I deal with the rest of this windfall? (I was already doing fine on my previous salary, so Iím looking at this as a big serving of 20% more gravy annually.)

Options:
  • Mortgage ($30K at 6.2%) Ė interest is high but amount owed is low, so Iím not sure I could refinance with much better terms. Should I throw the money at the loan and work to repay it in less than the 7 years Iím currently on track for?
  • Student loan (ongoing, 0%) Ė This is an odd one. Iím currently in school for my masterís degree (which may have been a contributing factor in my promotion, so hooray, it's already helping me after half a semester!), and my parents are helping me by giving me interest-free loans for tuition. So this debt is obviously not a hair-on-fire emergency, but there is some amount of pride involved. School will probably cost around $30K by the time I graduate Ė do I put the increase in my paycheck aside and use it to reduce the amount I owe my parents each semester? Itís not the fiscally smart call, but it might be the most ethical one.
  • Investment Ė Iím using a chunk of this raise to shore up my 401k account Ė would it make sense to put the rest in investment accounts that I can access earlier? VTSAX requires a $10,000 initial investment, but Bettermentís direct-deposit option is intriguing Ö
I'm happy to add any more details, so let me know if you have questions!

Spondulix

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Re: I got a big raise! ... Now what?
« Reply #1 on: November 19, 2014, 09:53:52 PM »
I'm wondering why the mortgage rate is so high. Even at 30k I would think you could refinance for a lower rate (unless it's a credit issue). Even going from 6.2% to 5% your payment would drop, meaning you can make additional principal payments and knock it down even faster.

VTSAX is the Admiral version - you only need $3k to get into the standard one (VTSMX). The fees are a bit higher (.17 vs .05) but on $5000 we're talking about a difference of like $20... and that's just for a year or two til you get it up to 10k.

Do you have a Roth IRA?

DK

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Re: I got a big raise! ... Now what?
« Reply #2 on: November 20, 2014, 06:17:54 AM »
Instead of a refi - you could probably consider a HELOC, it would probably cost less to do and have similar rates. No reason to be paying that kind of interest on a house these days. If for some reason you can't get the rate down, I would push the new moola at that.

Tax bracket info would be helpful in recommendations for tIRA, rIRA, taxable.

Also, congrats!

ScroogeMcDutch

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Re: I got a big raise! ... Now what?
« Reply #3 on: November 20, 2014, 06:20:24 AM »
My advice would be to make a plan on paying off your mortgage asap, and see when you would finish those repayments. Use those cashflow projects to see if you can get a better deal at another bank when refinancing.

A 6.2% guaranteed return on investment is something I'd sign up for now if I could :)

Terrestrial

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Re: I got a big raise! ... Now what?
« Reply #4 on: November 20, 2014, 06:21:22 AM »
Congrats on the big raise! It's hard to give specific advice without knowing the scale of what is left over in pure dollar terms.  A 20% raise on a 30k income is lot different than a 100k income in terms of how far it goes and how much you have to work with.

I'd generally go in this order for your situation:
1- Is moving the 401k up to 15% going to bring it up to the max (i.e. 18k for next year)? If not I would max it. 

2- I'd probably bang out the mortgage with any excess...it is a small ammt but 6.2% is a high enough guaranteed return that combined with the peace of mind of owning your house outright it would be worth it to me to knock it out if you think you are unable to refinance to better terms.

3- Very nice of your parents but I wouldn't take advantage either, and I know you said it was a point of pride for you.  If with the increased contribution the mortgage can be knocked out in a much shorter timeframe, talk with your parents to figure out if they can wait until then and then ask what kind of repayment schedule would make them happy.  Start on that, and with any extra money split between a Roth IRA or an after-tax acct in whatever proportion makes sense for your situation/goals.



hybrid

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Re: I got a big raise! ... Now what?
« Reply #5 on: November 20, 2014, 09:41:18 AM »
These would be my priorities regardless of income, so more income just speeds the process up.

Have six months living expenses liquid or easily liquidated (like stocks, not like a 401K)
Bury all of my outstanding debts excluding mortgage
Pay off my mortgage / put money in other investments

I'm going to go out on a limb and guess you are 33 by your username. You will have to make that call regarding how fast you want to pay off a house but at 30K it is awfully tempting to bury that debt as well. In your position though I would probably lean hard toward investments instead.

I would also look at having a diversified portfolio, stocks are at all time highs, precious metals have tanked. Real estate is very affordable in some sections of the country (like mine, where the housing market is very flat in many areas). 

MooseOutFront

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Re: I got a big raise! ... Now what?
« Reply #6 on: November 20, 2014, 09:45:02 AM »
I would put the whole thing toward 401k until it is maxed.  I view that as one of the minimum tenants before it's even time to start making choices with savings.  Assuming of course one has no hair on fire consumer debt, but that's a given.

smalllife

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Re: I got a big raise! ... Now what?
« Reply #7 on: November 20, 2014, 10:16:00 AM »
I have a similar situation regarding a parental offer/loan, except mine has a low interest rate, so this is what we plan to do when the fiance (yes Hybrid, fiance) and I finish saving up for his grad school tuition.

Split the extra money between mortgage and parental loan - you get some additional payoff while also going above the preset terms with the parents.  What that ratio would be depends on personal preference, time lines, and your relationship with your parents.

Depending on your income, max the 401k and get a taxable account started if you haven't already


*Assuming you already have what you define as an emergency fund in place, as I know those can vary

KHud1981

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Re: I got a big raise! ... Now what?
« Reply #8 on: November 20, 2014, 09:44:23 PM »
Thanks for all the advice! This has actually made me realize that I should really do something about that 6.2% loan.

OK, story time! Last year, I found a ridiculous foreclosure deal ($35K for a property that needed almost no work and is worth at least $70K). I had been looking for houses for a few months and had been burned a few times by investors swooping in with cash offers on the most promising properties. But this was a Fannie Mae house, so as an owner-occupant, I had the advantage for once. Cue my parents, who toured the house with me and also thought it was a great deal, and who offered to move some money around so I could make a cash offer of my own.

Once I owned the house, I went shopping for a home equity loan to pay back my parents. None of the big banks would lend me the full $35K, because they said they had to consider the "value" of the property to be the purchase price, and they couldn't go higher than 80% of that. My little credit union was willing to use the auditor's assessed value, but they came with the high rate.

Now that I've owned the house for more than a year, I believe the big banks can use the assessed value of the house. Time to go shopping for a refi!

A few more details from questions upthread:

The raise is from $50,000 to $60,000. So I'll be upping my 401k contribution from $5K (10% of $50K) to $9K (15% of 60K), nowhere near the max.

No Roth, just the 401k (which is at $89,000 right now) and a few investment accounts totaling about $20K. About $3,000 in cash. I run all transactions I can through a rewards credit card but don't carry a balance. No debt except the house. My 2005 Hyundai is paid off and should last me at least a few more years. I live in Ohio, so cost of living is low.

I think for the new year I want to look more at my spending and give myself a few facepunches to bring up my savings rate, but for now, I'm looking for a place to divert this new money BEFORE it winds up in my checking account and I end up getting used to it. :)

And hybrid, you are right - I am 33. :)

Thanks again for all the advice! For those of you who recommend putting it all into the 401k, why do you feel that's better than an investment account? Is it better for tax reasons, or just because it forces you to keep the money invested long-term?
« Last Edit: November 20, 2014, 09:47:44 PM by KHud1981 »

FrugalSpendthrift

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Re: I got a big raise! ... Now what?
« Reply #9 on: November 20, 2014, 10:13:21 PM »
For those of you who recommend putting it all into the 401k, why do you feel that's better than an investment account?
The 401k is technically an investment account, just one with a longer term outlook.  If you don't have any short term goals for the money, then you are better off investing it for the long term.

Is it better for tax reasons
Yes.

or just because it forces you to keep the money invested long-term?
and yes.

Terrestrial

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Re: I got a big raise! ... Now what?
« Reply #10 on: November 20, 2014, 10:35:32 PM »
I recommended 401k because you should shield the most you possibly can from taxes.  For me it has less to do with 'forcing' me to keep my hands off the money (I wouldn't touch it anyway) and more to do with paying as little as possible in return-killing taxes so that the largest possible amount of capital is compounding year after year.  Given that there are relatively simple ways that people can structure their portfolio to get themselves into 10-15% tax brackets in retirement, and particularly 0% for long term cap gains which is where the bulk of ER income will be coming from at least for me, no need to waste any more than necessary paying taxes at 28% marginal rates.

I personally found a few years ago it was easiest while you are young to work toward maxing out your 401k and getting used to that level of income.  Now that mine has been maxed for a few years as well as my Roth, every raise I get feels like a real raise because I have maxed my tax deferred options already, so now I am just building up my taxable accts that will float me until I can get my conversion ladder set up in ER or provide down payments for more real estate, as well as being able to increase my lifestyle expenses a bit and enjoy some of the raises without feeling bad that I didn't ratchet up my contributions more.

so long story short if I was you I'd take the entire raise and put it into your 401k since you won't hit the max limit.
« Last Edit: November 20, 2014, 10:43:12 PM by Terrestrial »

alaskacobalt

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Re: I got a big raise! ... Now what?
« Reply #11 on: November 21, 2014, 12:01:25 AM »
The crazy thing about more income is that it usually translates to greater spending without greater saving.  First step should definitely be maxing out the 401k.  That will reduce your tax obligation and will remove it from sight before you ever knew it existed in the first place. 

If you have managed just fine on your current income, makes the most sense to use all new income to become debt free.  SInce you aren't used to the new money, you wont notice it being gone.  If you are able to transfer it directly into accounts from your paycheck even better.  Again, if you are already living comfortably, leave it alone. 

Ricky

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Re: I got a big raise! ... Now what?
« Reply #12 on: November 21, 2014, 08:52:20 AM »
I think what you should do is evaluate whether the tax benefits of putting money into your 401k yearly is greater than paying off the 6.2% mortgage. $9k < $30k, so it still makes plenty of sense to pay it off ASAP if it's costing you more.

KHud1981

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Re: I got a big raise! ... Now what?
« Reply #13 on: November 21, 2014, 09:00:01 PM »
Thanks, everyone! This all makes great sense. I will definitely look to refinance the home loan and up the 401k.

be

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Re: I got a big raise! ... Now what?
« Reply #14 on: November 24, 2014, 01:16:52 PM »
1st of all, congrats on the promotion.  It sounds like you're pretty happy living where you are.  However if you are planning on moving out of your house in the next few years, that's something to consider. 

SeŮora Savings

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Re: I got a big raise! ... Now what?
« Reply #15 on: November 25, 2014, 05:51:07 AM »
There are a couple of things in your posts that concern me:

I had been looking for houses for a few months ...

None of the big banks would lend me the full $35K, because they said they had to consider the "value" of the property to be the purchase price, and they couldn't go higher than 80% of that.

My 2005 Hyundai is paid off.

I think for the new year I want to look more at my spending and give myself a few facepunches to bring up my savings rate, but for now, I'm looking for a place to divert this new money BEFORE it winds up in my checking account and I end up getting used to it. :)

And hybrid, you are right - I am 33. :)

(I was already doing fine on my previous salary, so Iím looking at this as a big serving of 20% more gravy annually.)

Options:
  • Mortgage ($30K at 6.2%) Ė interest is high but amount owed is low, so Iím not sure I could refinance with much better terms. Should I throw the money at the loan and work to repay it in less than the 7 years Iím currently on track for?
  • Student loan (ongoing, 0%) Ė This is an odd one. Iím currently in school for my masterís degree (which may have been a contributing factor in my promotion, so hooray, it's already helping me after half a semester!), and my parents are helping me by giving me interest-free loans for tuition. So this debt is obviously not a hair-on-fire emergency, but there is some amount of pride involved. School will probably cost around $30K by the time I graduate Ė do I put the increase in my paycheck aside and use it to reduce the amount I owe my parents each semester? Itís not the fiscally smart call, but it might be the most ethical one.
  • Investment Ė Iím using a chunk of this raise to shore up my 401k account Ė would it make sense to put the rest in investment accounts that I can access earlier? VTSAX requires a $10,000 initial investment, but Bettermentís direct-deposit option is intriguing Ö
I'm happy to add any more details, so let me know if you have questions!


You'd been looking at houses for a few months, and hadn't saved $7000 for a down payment.

Was there a time when your Honda wasn't paid off?  Perhaps right after you bought it new?

You consider it "doing fine" to be taking on debt (for your education) while fully employed.

You haven't looked at the index fund you're interested in closely enough to find the link at the top of the page to investor shares.

It looks to me like you have a cash flow problem.  There are too many expenses that you find your self unable to cover until after they happen.  Since you're able to get them eventually, you're not over consuming; you're just doing it in the wrong order.  My advice is an emergency fund first of all.  You're gonna need a new car or house repairs or money to tide you over between jobs someday, you can either pay your parents back for these slowly or save up slowly. 

Once you've got that set up, pay down your debt, then up retirement contributions, then get an IRA, then some taxable accounts. 

boarder42

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Re: I got a big raise! ... Now what?
« Reply #16 on: November 25, 2014, 06:35:32 AM »
pay off mortgage - decrease your 401k contribution to whatever is the least that gets full match and pay off the mortgage ASAP

after thats paid off max your 401k

hybrid

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Re: I got a big raise! ... Now what?
« Reply #17 on: November 25, 2014, 06:47:56 AM »
I have a similar situation regarding a parental offer/loan, except mine has a low interest rate, so this is what we plan to do when the fiance (yes Hybrid, fiance) and I finish saving up for his grad school tuition.

Wha wha what?????  Congratulations! That is one lucky guy, so say your Richmond Mustachian Buddies.

Dicey

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Re: I got a big raise! ... Now what?
« Reply #18 on: November 25, 2014, 07:52:55 AM »
Though it sounds a little harsh, I'd consider Senora Savings' post carefully. I did not get quite the same impression, but her questions are worth examining in depth.

However, I am going to make a contrarian suggestion. Consider a HELOC as previously suggested, or better still, a cash out re-fi. Pull all the money you can out of the house at the lowest fixed rate you can find. Then use the extra cash to pay for your degree yourself. Pay your parents back right now. You are a big girl and need to be paying this yourself, not dipping into the Bank of Mom & Dad. You will not believe how empowering this is going to feel.

Establish an emergency fund and then throw everything into investment savings. The secret the kill-all-the-debt crowd hasn't learned yet is that the earlier you save for retirement, the less you have to save. Mortgages are a great hedge against inflation and a tool for creating wealth. Five years from now, when interest rates have normalized, there's going to be a lot of pissing and moaning about those super low interest rate loans that got paid off early. Don't be one of them.

It's very likely that your income will continue to rise in the years ahead. You don't have a lot put by for retirement yet. At 33, this is getting critical. Throw everything into investments for now. Later, as your income rises, you can consider paying off the mortgage early. There is a world of difference between being "debt-free" and having a load of money in investments. You can retire early with a mortgage. You can't retire early without enough money saved. The sooner you start, the faster you get there...

TrulyStashin

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Re: I got a big raise! ... Now what?
« Reply #19 on: November 25, 2014, 08:04:07 AM »
I have a similar situation regarding a parental offer/loan, except mine has a low interest rate, so this is what we plan to do when the fiance (yes Hybrid, fiance) and I finish saving up for his grad school tuition.

Wha wha what?????  Congratulations! That is one lucky guy, so say your Richmond Mustachian Buddies.

Heck yeah!!!!    OMG, he is one lucky dude.   We need a (Mustachian) party to celebrate!!!  Dibs on hosting this one.