I got a Promotion, Now What?

August 2022 – Contributed by Vantage Financial

For those who are reading this article that have recently received a pay increase, are taking on newer responsibilities in their workplace, or are entering an entirely new work environment, take a moment to celebrate as your hard work has paid off!  There are a few things to be mindful of when it comes to making your next career transition, as the impact of these changes can happen a lot slower than most other life events.

Make sure you aren’t falling into lifestyle inflation.  While inflation in general has been a hot word in 2022, lifestyle inflation has most likely been sitting out of sight, as most people are already aware they are spending more on the basics.  Lifestyle inflation is the spending increase caused solely by an increase in income, where general inflation is a result of the value of the dollar falling causing goods to increase.  Now, this isn’t meant to ruin anyone’s fun in celebrating a recent promotion, taking an extra vacation for the year, or even letting off some stress, but it is important to pay attention to the spending habits you develop as a result of your additional income.  While it is always fun going out to nice restaurants and sporting events, you can avoid lifestyle inflation by maintaining a consistent budget, and not give in to the temptation of making these discretionary short-term spending goals new recurring expenses.

Update your tax withholding elections. Uncle Sam is probably as happy as you are about your promotion or pay increase, as he will be expecting more in taxes from you given the increase in income.   If you are only getting a pay increase, it will be best to submit a new form W-4 to modify your tax withholding from your paycheck.   For those who are self-employed, this would mean an increase in any estimated quarterly tax payments.  To prevent having to pay underpayment penalties, you will need to withhold a total of 90% of the current year tax liability, or 100% of last year’s amount owed.  It’s also important to try to dial this in as close as possible to your exact tax liability, as refunds paid to you typically do not earn interest unless the IRS is late, but late and underpayment fees that you may incur do accrue interest. 

At Vantage, were here to help ensure you keep on track with your goals without falling behind on the things you enjoy the most given the changes you encounter.  While we are more than happy to help you keep track of your budget, we can also review your overall compensation to provide insight on your financial plan to see what areas of your plan are impacted the most, and help you make your necessary adjustments to keep your plan as successful as possible.   

This material is for informational purposes only.  It is not a recommendation or solicitation to buy or sell any securities.  Vantage Financial is not a tax advisor; please consult your tax advisor prior to making any investment decisions.  Vantage Financial is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”).  SEC registration does not imply any particular level of skill or expertise.