Key ideas

1. You keep less than the raise. Federal income tax, Social Security, Medicare and any state tax come out first. A $5,000 raise kept $4,017 in the example.
2. A higher bracket doesn't shrink your pay. Only the dollars above the bracket line pay the higher rate. Everything below it is taxed the same as before.
3. Move half before the first bigger check. Change your 401(k) percentage or automatic transfer now. Money you never see in checking is money you won't spend.

Vocabulary

Lifestyle creep

When spending rises to match each raise, so your income grows but your savings don't.

Savings rate

The share of your income you save instead of spend, written as a percent.

401(k)

A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.

Marginal tax rate

The tax rate on your next dollar of income. It is the rate of the highest tax bracket your taxable income reaches.

Standard deduction

A flat amount the IRS lets you subtract from your income before tax is figured, if you do not itemize deductions.

Emergency fund

Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

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.

1. Raise
2. Federal income tax (12%)
3. Social Security + Medicare (7.65%)
4. Raise after tax
5. Per month
6. To savings
7. Left to enjoy

Check yourself

1. Your taxable income is $500 under the top of the 12% bracket. You get a $2,000 raise. How much of the raise is taxed at 22%?

   • A. $0
   • B. $500
   • C. $1,500
   • D. All $2,000

2. What share of wages goes to Social Security and Medicare for most employees?

   • A. 7.65%
   • B. 6.2%
   • C. 12%
   • D. 15.3%

3. When is the best time to raise your 401(k) contribution after a raise?

   • A. At the end of the year
   • B. After a few months, once you see your budget
   • C. Before the first bigger paycheck arrives
   • D. Only when you get a bonus

Your turn

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.