The following is a staff writer post from MikeS. He is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
Recently, I let you peak in on what I did with my performance bonus for this year. Now, I am going to let you in on what I did with my salary increase for this year. I find out both numbers at the same time, but the bonus is paid in March and the salary increase does not begin until the first April paycheck. This year, I received a 2% increase on my base salary. This translated in $1,900 more per year or just over $155 a month. The next question is what did I do with the extra money?
Dividing the Extra
Over the last few years, raises generally have been used to help stabilize the budget and plug any deficits there may have been. This year was different though. I have been actively minimizing our expenses whenever possible. The most notable one recently was my mortgage refinancing that I wrote about. That freed up just over $300 a month, $200 of that went back into the mortgage payment, while the rest went to our monthly spending. So, I did not need the raise to plug any budget holes this year. That leaves me with a few options on to do with the raise.
I could increase our monthly spending categories. We sent aside money every month for things like car expenses, kid expenses, house expenses or trips. There is nothing wrong with a little lifestyle inflation; people should be able to enjoy the fruits of their labor after all. I just felt that we could make our financial picture stronger rather than just increase our spending. That means the bonus would be going towards savings. Not all savings are the same though.
I consider our savings in roughly three categories, retirement, cash savings, and our brokerage account. The cash savings are at Capital One 360 and the brokerage account is with Vanguard. Between those two, we allocate about $150 a month, with a majority going to the Vanguard account. Right now, I am comfortable with the balances of each. I consider the two of them my emergency fund. I have roughly 6 months of expenses saved in them. Mind you, not all of it is purely dedicated to the emergency fund, but if I lost my job tomorrow, all of it becomes available for the emergency. That means I don’t really want to up the monthly amount going into them. That leaves retirement savings as the landing spot for the salary increase.
My company offers both a traditional 401k and a Roth 401k, so I need to choose which one I increase my contribution rate. My current contribution rates are 6% for the traditional 401k and 1% for the Roth 401k. I selected this allocation because the company only matches on the traditional plan and matches up to 6%. So, anything less than the 6% and I am throwing away free money. So, why contribute to the Roth at all? I believe the tax treatment will allow the Roth to be better for me in the long run. Currently, I take advantage of the income tax deduction for mortgage interest and tax credits for having children. I likely will not be able to take advantage of these when I retire, because the house will be paid off and the kids will not be on my tax return anymore. So, in all likelihood, I’ll be in a higher tax bracket upon retirement. Going with that assumption, it makes the most sense to increase my Roth contribution by 1%. This works out to $80.75 a month. So, where did the remaining $74 a month go from the raise? The short answer is taxes, mainly. My tax bill is increasing by about $50 a month. The remaining $25 went to increase our fun money, $10 a month for my wife and $15 for me.
It was nice to see the hard work of reducing the expenses pay off in the ability to increase my retirement savings. Now, with the raise and increased savings, $15,500 a year will be going into the 401k. This is pretty good considering that in 2009 I wasn’t contributing at all. Did you receive a raise this year? What did you do with it?