Smart Finance: Why a Salary Bump Shouldn’t Mean a Spending Spree - Navigating Long-Term Financial Decisions

I’ve seen folks get bumped up with a promotion (e.g., IC to a manager or senior manager to director) and then go out and buy a new house a few months after with their new salary. The issue is that you’re making a thirty-year decision (or hopefully a 15-year one).

It would help if you thought about your finances, overall goals, and the length of time you would earn a salary at that new promotion level. For example, are you planning to retire from this firm? Are you confident in the firm’s financial standing for that time?

When you get that bump, resist that urge to increase your expenses, or at least hold off until you determine if that next level is something you want to do over the long haul.

You were making $100K as a manager and got bumped to the next level (senior manager or director - the title will depend on your firm). Let’s say it’s a 20% bump in your base pay, bringing you to $120K (and that 20% bump might be tricky, given you don’t have much room to negotiate for internal positions). Let’s take that 120K and divide it by 24 (payday twice a month), bringing a gross paycheck of $5K (pre-tax). Call it 30% taxes (highly dependent on your income level), but say you get $3500 after taxes. With your previous salary, you had a paycheck of $2916. So you’re getting roughly $600 more compensation, or $1200 a month. That salary change means an extra $14.4K per year, or over five years, that’s $72K. Buying your new house means moving from a home that costs you $350K to a house that costs $750k, which is crazy. Sure, you find a lender that will loan you that money, but don’t make that deal solely based on your increase in pay.

Again, decide what to do with that extra $1200 a month before it flies out the door. Suppose you try to keep up with the other managers at your new level (the new car, the bigger house, the trip to Cabo, etc.). It doesn’t mean you can’t do that, but be intentional about how you want to spend that increase.

As you take those higher salaries, be careful not to tie yourself to a job you don’t know if you want long-term. Lifestyle upgrades make even less sense for a depreciating asset like a car or the manager trifecta of upgrading the house (with the new neighborhood), the new car (maybe leased), and the new set of clothes to “look the part.” Sure, some of those things might make sense (except the leased car), but be intentional about how you’re spending that money and what it’s locking you in for in the long term.

That new job means going from a couple of business trips a year to a week-long trip every month, maybe twice a month when you have to kick off a new project for a client. You tell yourself that you can do it for the pay bump, but six months into the job, you realize that you are missing all of your family events, you feel like a stranger in your own home, and the airport bartender knows you by the first name, and you’re worn down all the time.

And you won’t get out of the situation, but now you can’t because you tied yourself down purchasing “stuff.”