Getting a raise at work should be all good. But many people fall into a trap and end up in worse shape financially. Discover how to stay out of the trap.
We discuss the trap that comes from getting a raise on The BIGG Success Show today. Here’s a summary of that discussion.
This show was inspired by our latest free resource. It helps you quickly discover how your finances compare to an average American in five key areas. (You can sign up below to get your free copy.)
Do you think a pay raise is a good thing? Of course, it is. Right? But only IF you understand the inherent problem that comes with it. That’s what we want to discuss with you today.
Getting a raise of $500 a month
In this example, you get a raise of $500 a month (or $6,000 year). Just think what you could do with this extra money!
You could take that vacation. You could buy a new car. There are so many possibilities.
Let’s say you buy a new car. Your payments are $500 a month. So let’s do the math:
$500 new income minus $500 new car payment nets out to $0.
Many (if not most) people who get a $500 a month pay raise quickly spend $500 a month. They end up no better off, right?
Actually, they end up worse off. Because of the tax trap…
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The tax trap
When they get a raise, many people fall into a trap – they forget to factor in taxes. How would taxes affect your pay raise in the example above?
You need to know your marginal tax rate (MTR). Your MTR is the percentage of taxes you will pay on your next $1 of income. So if your MTR is 20% and you make $1 more, you will pay 20 cents in taxes ($1 x 20%).
In our example, you got a $500 a month pay raise. Let’s say your MTR is 20%. So you will pay $100 in taxes ($500 x 20%), leaving you with a net increase in income of $400.
But here’s where the trap comes in: You have a new $500 car payment.
Subtract that $500 outflow from the $400 after-tax increase in income we discussed two paragraphs ago, and you quickly see the problem:
You’re in the hole $100 a month.
To recap, you got a $500 a month pay raise. You have $600 in new costs ($100 in taxes and a $500 car payment). So your cash flow has fallen by $100.
Getting a raise is good. Know your MTR so it stays good.
How to Find Your MTR
How can you determine what your marginal tax rate is? Our FREE guide will show you. In addition, you’ll quickly see how your finances really compare to middle-class Americans in five key areas.
Until next time, here’s to your BIGG success!
George “The Professor” & Mary-Lynn
Co-Founders, BIGG Success
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