Smart Money Moves After a Promotion: Build Wealth, Not Just Lifestyle

Just got a promotion or a pay rise? Congratulations! While it’s tempting to celebrate by upgrading your lifestyle, the real key to long-term success is making smart financial decisions that help you build lasting wealth. Your increased income presents an opportunity to strengthen your financial foundation, achieve your goals, and secure a brighter future. Here’s how to turn your pay rise into meaningful financial growth, not just temporary luxuries.

1. Redefine what’s important to you

With every increase in income, take the time to revisit and redefine your financial goals and what is really important to you. It is OK to spend money on things like nice handbags or cars but just ensure you truly value those things and that they represent great bang for your buck. Maybe you’re aiming for a new home, a dream holiday, transitioning to part-time work, or early retirement. One powerful way to align your pay rise with these goals is to use the bucket savings strategy.

Bucket Savings Strategy: Divide your savings into different “buckets” based on short-term, medium-term, and long-term goals. For example, allocate a portion for your car upgrade, another for your dream holiday, and the rest for long-term goals like retirement / investing. This strategy helps you visually organise and prioritise your savings.

If you have a home loan, then make sure you don’t just leave the funds in a working account not earning any interest and that you look into the option of having offset accounts to offset your loan interest instead. Usually, your loan interest is a lot more in terms of savings than the after tax return on the interest you earn on high interest savings accounts.

Practical Example: If your new income adds $3,000 a month (after tax), consider saving $300 for your new car, $400 for your dream holiday, $1,000 for long-term savings / investing, $1,000 to reduce your mortgage quicker and the rest you can use to treat yourself!

2. Fine-Tune Your Budget

It’s tempting to immediately upgrade your lifestyle with a new pay rise, and while it’s perfectly okay to treat yourself, it’s important to maintain balance. Consider the “50/50 Rule” when adjusting your budget.

50/50 Rule: Spend half of your new income on lifestyle related expenses (i.e. holidays, car, clothing, etc.) and put the other half to work by either making extra loan repayments, investing or contributing to super. This way, you enjoy the fruits of your hard work while still making sure your financial future is secure.

3. Set Up Your Emergency Fund

If you haven’t done this then this should be number one on your list. Your emergency fund should grow in proportion to your income and expenses. We usually recommend our clients have an emergency fund that covers at least six months of essential living expenses. This should include your rent or mortgage, utilities, groceries, and other day-to-day expenses.

Practical Guidelines: Build your emergency fund in a high-interest savings account or an offset account linked to your mortgage. Ideally, you should also have income protection insurance with a waiting period of no more than 90 days (unless you have a lot of savings / leave entitlements) and other key insurances like Life, TPD (Total & Permanent Disability), and Trauma insurance. This ensures you’re covered in the event of illness or disability.

Practical Example: If your monthly living expenses amount to $10,000, aim to have at least $60,000 in an accessible emergency fund. This gives you peace of mind knowing that in case of any unforeseen events, you’re financially secure.

4. Supercharge Your Retirement Savings

Maximising contributions to your superannuation fund is one of the smartest things you can do with a pay rise. However, careful consideration is required when contributing to superannuation so that you are aware of the accessibility rules, legislative risks and how it impacts your other goals. It is highly recommended you engage a financial adviser for personalised advice suited to your goals and needs.

Tax Benefits: Salary sacrificing into your superannuation fund not only boosts your retirement savings but it may also reduce your taxable income, giving you potential tax savings.

Practical Example: Let’s say your pay rise adds an extra $30,000 to your annual salary. By salary sacrificing $5,000 into your superannuation, you reduce your taxable income while also growing your retirement nest egg. When the funds are contributed to super these are usually taxed at 15% whereas your marginal tax rate may be 39% or 47% including Medicare Levy. This represents a return of 24% or 32%! Over time, with the power of compound interest, this could translate into thousands of extra dollars when you retire.

Note: The funds are then invested in line with your superannuation strategy so the returns will depend on the return of your underlying investment options. Again, financial advice is very important here to ensure you understand the risks and to ensure it fits into your overall financial plan.

5. Tax Smarts: Optimise Your Tax Planning

A higher salary often means a higher tax bracket, so it’s essential to understand the tax implications of your pay rise. Consulting with a tax adviser can help you implement strategies to reduce your taxable income and keep more of what you earn. A financial adviser can also help you and depending on the complexity of your situation your accountant and adviser should work together to ensure your overall tax planning is taken care of as best as possible.

Tax Effective Strategies: Consider tax-effective investment vehicles or deductions for work-related expenses or work-related education. Structuring your finances in a tax-smart way can also result in significant savings. It may be beneficial to set up discretionary trusts or investment companies. Accounting and financial advice is crucial to ensure you have the right structures set up.

Final Thoughts

A promotion or pay rise is a huge accomplishment, but it’s also an opportunity to take your finances to the next level. By seeking sound advice and using the extra cashflow strategically, you can turn your income boost into lasting financial success.

If you need expert guidance on managing your finances post-promotion, don’t hesitate to reach out to a qualified financial adviser.

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Your Vision Financial Solutions Pty Ltd ABN 64 650 296 478 and its Advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This article has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.