# What to do with a raise

> Find the raise's after-tax amount per paycheck, automate at least half into saving or debt, then enjoy the rest.

Source: https://www.walletprep.com/learn/what-to-do-with-a-raise/ · Updated 2026-10-04 · Work and income

Figure out what the raise adds to each paycheck after tax, then send at least half of it to savings, debt or retirement before your first bigger check arrives. Spend the rest on purpose, so your life gets better and your savings rate goes up at the same time.

## Key facts
- **Brackets tax only the extra.** US income tax is marginal. Each rate applies only to the slice of taxable income inside its bracket, so crossing into a higher bracket raises the tax on the new dollars only.
- **Payroll taxes take 7.65%.** Social Security is 6.2% and Medicare is 1.45% of wages for most employees, so 7.65% of the raise goes to them before income tax. State and local income tax can take more.
- **Lifestyle creep is the default.** Without a plan, a raise tends to disappear into slightly nicer everything. Deciding the split before the first bigger paycheck is what keeps part of it.
- **Pre-tax saving costs less.** Money you add to a traditional 401(k) comes out before federal income tax, so raising your contribution by $100 a paycheck lowers your take-home by less than $100.

## How much of the raise you keep
Start with the raise in dollars a year. Take out 7.65% for Social Security and Medicare. Then take out federal income tax at your marginal rate, which is the bracket your last dollar of taxable income falls in, and any state or local income tax.
For 2026, a single filer subtracts the $16,100 standard deduction from income to get taxable income. The 12% bracket runs up to $50,400 of taxable income and the 22% bracket up to $105,700. Your pay stub after the raise shows the real number, so compare one stub before and one after.

## Why a higher bracket is not a trap
Suppose your taxable income was $1,000 below the top of the 12% bracket and a raise adds $3,000. The first $1,000 of the raise is taxed at 12% and the other $2,000 at 22%. Every dollar you earned before the raise is taxed exactly as it was.
The one place a raise can really cost you is an income-based benefit with a cutoff, such as Medicaid, help with child care or some student aid. If you get one, check its income limit before you plan the money.

## A simple split that works
A rule of thumb is to save at least half of every raise and spend the rest. Saving can mean a higher 401(k) percentage, a bigger automatic transfer to savings, or extra payments on a credit card. Spending can mean anything you'll actually enjoy.
If you have high-interest debt, point the saved half at it until it's gone. If you don't have an emergency fund, build that first. If both are in good shape, raise your retirement contributions. The 2026 limit for your own 401(k) contributions is $24,500.

## Make the change the same week
The best time to move the money is before you see it. Log in to your benefits site and raise your 401(k) percentage, or change your automatic transfer to savings, the week the raise is announced.
If your raise is 4% and you move your 401(k) contribution up by 2 percentage points, your paycheck still goes up and your savings rate climbs. Do this with every raise and the savings rate keeps rising without your budget ever feeling tighter.

## Watch for slow drift
Lifestyle creep rarely looks like one big purchase. It's a pricier phone plan, more delivery, a bigger rent when the lease renews. None of these are wrong, but together they can absorb a whole raise within a year.
Track your spending for one month after the raise starts. If your savings didn't go up, find where the money went and decide on purpose whether to keep it there.

## A worked example: splitting a $5,000 raise
Priya earns $55,000 and gets a $5,000 raise. She files single, lives in a state with no income tax, and stays in the 12% bracket.

- Raise: $5,000
- Federal income tax (12%): −$600
- Social Security + Medicare (7.65%): −$383
- Raise after tax: = $4,017
- Per month: $335
- To savings: −$170
- Left to enjoy: = $165

1. Tax on the raise is $5,000 × 12% = $600 plus $5,000 × 7.65% = $383. She keeps $5,000 − $600 − $383 = $4,017.
2. Per month that is $4,017 ÷ 12 = about $335. She sets up a $170 automatic transfer, a little more than half.
3. That leaves $335 − $170 = $165 a month to enjoy, and $170 × 12 = $2,040 a year saved.

## Common mistakes
- **Turning down a raise over brackets.** Some people fear a raise will cost them because of a bracket. It won't. Only the dollars above the line pay the higher rate, and your take-home pay still rises.
- **Planning from the gross number.** Signing a bigger lease based on the full raise can spend more than you keep. In the example, a $5,000 raise became $335 a month, not $417.
- **Waiting to decide.** If you wait a few months, the extra money is already part of your normal spending, and moving it to savings feels like a pay cut. Decide the split before the first bigger paycheck.

## Questions people ask
### How much of a raise should I save?
At least half is a good rule of thumb. If you have credit card debt or no emergency fund, save more. If your savings are on track, you can enjoy more of it.

### Can a raise ever lower my take-home pay?
Not through federal income tax brackets. It can leave you worse off overall if it pushes you past the income limit for a benefit, like Medicaid or a child care subsidy, so check those limits.

### Should I put my raise in my 401(k) or pay off debt?
Get the full employer match first, since it is extra pay. After that, debt with a high interest rate, like a credit card, usually comes before extra retirement saving.

### How do I calculate a raise per paycheck?
Take the yearly raise after tax and divide by your pay periods: 26 for every two weeks, 24 for twice a month, 12 for monthly. In the example, $4,017 ÷ 26 = about $155 per biweekly check.

## Do this today
Work out your raise after tax per paycheck, then log in to your 401(k) or bank and move at least half of it with an automatic contribution or transfer that starts with the next check.

## Sources
- [IRS: Tax inflation adjustments for tax year 2026](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill)
- [IRS: Topic no. 751, Social Security and Medicare withholding rates](https://www.irs.gov/taxtopics/tc751)
- [IRS: 401(k) and IRA limits for 2026](https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500)
- [IRS: Tax Withholding Estimator](https://www.irs.gov/individuals/tax-withholding-estimator)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._