The not-so-bad problem of what to do with new money.

April 28, 2009 10:00 PM

I'm about to see a huge increase in my income. What should I know?

I've just landed a dream job, and as a result I'm going to see my household salary approximately quintuple (from around $50,000/year to starting at around $250,000/year) and with more large increases possible in the future. I've never had large amounts of money before and want to be aware of what changes I'm about to experience (besides the obvious: now I can buy more things).

I'm not looking for specific investing advice. I'm more interested in general advice and insights, particularly from anyone who has ever experienced something like this. What did you wish you knew when the money started to roll in? What did you do wrong? What did you do right?

posted by anonymous to work & money (26 comments total)

I've always respected those people you hear about who keep banking up any raises. Think of where you'd be in 5 years if you just kept living on $50k!
posted by niles at 10:04 PM on April 28 [13 favorites has favorites]

Go get a few new swank suits to wear, time to dress like you're earning that money... could be expected of you, actually.
posted by lizbunny at 10:23 PM on April 28

If you're quintupling your salary, buy a few nice things (nicer clothes for work, maybe a little treat for yourself), and then set out to save a huge chunk of your income. Put as much as possible into a 401k. Sock away some more in a brokerage account. You may see an increase in tax liability, so consult an accountant about how much you should have taken out of your paychecks. Maybe consider donating to charity (when my income changed drastically, I earmarked about 10% a year for charitable donations).

Congratulations on your new job!
posted by bedhead at 10:27 PM on April 28 [2 favorites has favorites]

Hire a good tax adviser. Ask around and spend time finding a good one. You can probably sock a good chunk away in retirement and kids college accounts. If you want to give money to family members, charities and causes there is a right and a wrong way to do this tax-wise.

The money will go a lot faster than you think. Every time you buy something or upgrade a car, wardrobe, cellphone or house remember to factor in the increased upkeep on your new purchase. If you are not familiar with the upkeep on something you're considering purchasing, ask! Ease into upward mobility and you'll be a lot better off than most of your peers.
posted by fshgrl at 10:27 PM on April 28 [1 favorite has favorites]

Congratulations! Many things in your life are about to get easier, and you can figure out those, but some of the things that now get more complex are: your job, and your finances.

Regarding your job, you may be taking a big step up in responsibility, or making a switch from one industry to another, possibly with changes in how things work and how you are expected to act (for example, going from non-profit to corporate, or academia to industry).

With finances, sock away what you can into retirement plans and long-term investments that you now have access to and can afford. You don't necessarily have to live the same life as other people making 250k - you can be as frugal or as luxe as you want (within your budget). Enjoy your new economic status, and good luck!
posted by zippy at 10:30 PM on April 28

Don't jack up your lifestyle! Since you're now making 5x, increase your spending by only 2x, save the rest, and you'll be fine. You'll have a lot of saving, and you'll be prepared in case your salary ever decreases.
posted by lsemel at 10:32 PM on April 28 [7 favorites has favorites]

Talk to a tax guy and get him to tell you what your take home actually will be and compare to your current take home.

Your takehome will _not_ be 5x what you are making now.
posted by rr at 10:40 PM on April 28

Wicked, congratulations!

My salary quadrupled when I got my first real job (not that it was a lot of money in absolute terms, but I was living like a pauper before that). I decided to pretend I was making 1.5 times my old salary instead of 4x, and it worked really well. To me it felt tremendously luxurious to be spending so much more cash than I was used to, and yet, at the same time, I saved a HUGE wad of cash, eradicated my debt, and my credit rating soared.

Basically I arranged my pay deposits so they went into two different accounts- the "spend fund" was a regular chequing account, with a debit card, which I used for everyday expenses, and the other half into the "save fund", a high-interest savings account. Once in a while I'd need a little more cash for a larger purchase or trip or whatever, and when that happened I'd happily pull from the savings account- but in general, I just didn't need, or even notice, that cash as I was already living on more than I was used to. And then every months or so, I'd put most of what was in the savings account into an even higher-interest GIC or mutual fund or whatever.

Given your numbers, I think I personally would probably give myself a big splurge for the first few paycheques- just go nuts and get a bunch of fun stuff: wardrobe upgrade, pay off your debts, wicked first vacation, presents for family & friends, new couch, whatever, that kind of stuff. But after say $10K on extravagant/practical immediate expenses, I'd pretend things were back to normal and try to live on, say, $70K and bank the other $180K... Imagine saving up $180K a year for a few years? That'd be ace. Good luck and I'm happy to hear about your big ka-ching!
posted by pseudostrabismus at 10:42 PM on April 28 [6 favorites has favorites]

Definitely in the bank/save it camp. Like others are saying, treat yourself to a nice raise, but take a lot of that extra and stuff it somewhere for a rainy day. You never know when there will be one. I'm a walking example of that. One year, 65K a year, next year 23K (due to the wild adventures of contracting with apparently unreliable clients ;P). As pseudostrabismus says, if you're upping "your" salary to 70K which is a nice 40% raise and you save the rest, for each year you do that that's two years of "coasting" time if something happens.

Alternatively, taking some of that extra money that's destined for saving and using it to obliterate any existing debts/mortgages you have never hurts. While you're not banking it, you're using it to eliminate potential problems in the future and saving the interest costs.

Definitely don't do something silly like go looking for a house or an expensive leased car (or cars) with a huge mortgage to match your new income. I've seen a few friends do that, and it usually ends poorly. See rainy day comment above. Personal anecdote on that, I knew a guy who was 19, working at a .com making 80K a year in 1999, when the previous year he'd made around 4K and was living at home. A few months after he landed the salary when the company got funded (he was the main programmer in the .com's product and one of the founders), he moved out to a huge apartment downtown, just a few blocks from the offices. Then he decides he needs a sports car, so he gets an NSX. Then he's out doing the partying and all the other wild and crazy stuff a 19 year old with a salary like that would do. Fast forward 12 months and he's now in a place where his lifestyle has consumed the bump in salary and MORE. Still has the apartment, still making payments on the NSX, but can no longer afford to put insurance on the NSX, so it sits in his parking stall eating money. Then the bottom dropped out of the NASDAQ and you can imagine what happened from there ....
posted by barc0001 at 11:07 PM on April 28

Four words:

Pay. Your. Estimated. Taxes.

Trust me.
posted by mmoncur at 11:22 PM on April 28 [5 favorites has favorites]

Now you don't need to worry about who picks up the check at dinner.
posted by zephyr_words at 11:38 PM on April 28

One suggestion: Do some reading on the psychology of wealth. Newfound money can be a surprisingly complex emotional challenge, and it can complicate and test your relationships in ways you probably haven't much considered before.

For example: How might you handle people who seem to think a higher salary has suddenly solved all your problems, or put you "out of their league"? What about thinly veiled envy from friends and acquaintances? How will you handle it if you're asked for loans or outright gifts more often, because now you can afford it? And so on.

Other general advice: Live within - and preferably, well below - your means. Invest responsibly and wisely, with an eye toward building capital so that you will eventually have the option of living off passive income. (I like Mutant's approach). And find yourself a good tax accountant and a fee-only financial advisor to help you with the practical side of handling your money wisely. (Full disclosure: IAAA, but IANYA).

Congratulations on the dream job! Enjoy it!
posted by velvet winter at 1:04 AM on April 29 [6 favorites has favorites]

250k, you're gonna be working your butt off. Pay for things to keep you healthy and productive, if you need them, like gym memberships, and time savers, like cleaning and cooking services, if you need them.
posted by By The Grace of God at 4:58 AM on April 29

Make up what you haven't been saving toward your retirement. Make it up NOW.

Get a great financial adviser.

If you don't have an emergency fund, make one.
posted by Medieval Maven at 5:37 AM on April 29

As velvet winters said, a large spike in income can bring emotional challenges. You don't say how old you are, but your age may impact not only your long-term investment strategies but also your relationships with friends and family. If you are relatively young (if, for example, if you are now earning much more than your friends and same-age peers) these changes may seem more pronounced. The main thing that I noticed was that my parents’ attitude toward me charged dramatically after I began making more than they did. Although I had not depended on my parents financially for several years, they retained the well-intentioned, but paternalistic (and, at times, somewhat condescending) mode of pragmatic “advice-giving” that is expected from hard-working, middle-class parents who “know better” than their liberal-arts-major kids. It was jarring to go from that kind of a relationship to the one that I have with them now; where they assume that I know better than they do (even when I don’t) and where they now call me for advice. I won’t say that this change has been a bad thing, but it occasionally leaves me feeling as though it is my success, not me, that they are proud of. It is possible that you may encounter similar situations. Your success is something to be very proud of, but do not let it define who you are because nothing is certain.
posted by applemeat at 6:05 AM on April 29 [2 favorites has favorites]

If you're not that knowledgeable now about investing, put in the time to educate yourself. I strongly urge you not to blindly trust your money to anyone else. I suggest The Bogleheads Guide to Investing and its associated wiki. The time you put in now will be more than compensated by the money you save on fees and mistakes from financial planners. Pay particular attention to tax-efficient investments.
posted by Durin's Bane at 6:15 AM on April 29

Although it's not reasonable to expect you to maintain your current standard of living, you should ramp it up SLOWLY. Start with your clothes (as someone already mentioned, it might actually be expected of you in your new position). Don't change your definition of luxury -- if you were never crazy about cars, don't start spending money on a really nice one. Don't buy stuff because you can; buy it because you need it, or because it it will make you very happy. Save up for a huge down payment on your dream house, and once you've got it go house hunting at your leisure.

And, obviously, eliminate debt ASAP and build up at least 12 months living expenses in a liquid account. You never know what's around the corner.
posted by Simon Barclay at 6:23 AM on April 29

You hear about people who win the lottery, who end up in a huge house with lots of cars...but with no friends and end up in ruin. The point is, you need to make the money work for you and not be the master of you. The best advice I've heard is to spend extra money on improving your day to day living and to reduce annoyances in your life. So go to a better gym, live closer to work (shorten commute), hire a maid. Your TIME will become more valuable to you now, so focus on spending THAT in the right way, and don't even worry about the money - sock that in the bank for a while until you're more comfortable with it.
posted by lubujackson at 6:23 AM on April 29

Pay. Your. Estimated. Taxes.

Actually, you should talk to a tax guy about this. You may be able to take advantage of a loophole: you don't get hit for underpayment penalties if you pay at least the taxes you owed last year. In your case, that number will be significantly less than what you owe for this year, and so you can get the use of that money until next April.
posted by smackfu at 6:26 AM on April 29

Just make sure you are withholding enough so that you don't get a nasty surprise come April. If you have a spouse that works this is even more important. Don't forget state taxes either. Especially if you have a spouse the best way to do this is use a 1040 form from last year.
posted by caddis at 7:30 AM on April 29

I like the idea of pretending you didn't get such a huge raise, and banking a lot of it (after paying off debts). But also give to charity: if you start when you first get the huge raise, you won't notice that the money is "gone".

Congratulations on the new job!
posted by kestrel251 at 7:33 AM on April 29 [1 favorite has favorites]

I have some experience with this.

Keep an eye on your day-to-day expenses. It's fun at first not having to check the price labels at the grocery store anymore, to just go buy whatever food you feel like buying -- and to some extent this sort of thing is fine. But it's pretty easy for this to turn into just an ongoing flow of money out the door, for stuff you don't really even remember buying. I remember being shocked at one point when I added up my expenses for the month and found out how much money I was spending on just random things: it didn't feel like I had changed my lifestyle at all, but somehow I had made it much more expensive to do the same stuff.

At the other end of the spectrum is the big purchases. It's going to be tempting to move into a bigger house, buy a bigger car, buy a boat, buy a vacation home, remodel, redecorate, whatever. At some point it's going to click in your head that these things which were totally out of reach for you before, you can now just write a check! It's exciting!

But the thing to remember about purchases of this sort: pretty much anything you buy is going to cost you more than the purchase price -- it's also going to take work and more money to maintain. By all means, if you've always dreamed about trading in your crappy car for a luxury automobile, go ahead and do it... but don't do it just to keep up with the neighbors or because you think it's expected of you or, well, just because you can. Make sure you really do want the thing you're thinking about buying, that it'll actually make you happy every time you use it instead of becoming another object you have to keep track of. (I know, it sounds stupid, but it's an easy mindset to fall into -- especially if your new co-workers are of the spend-to-impress type.)

Speaking of which: don't spend your way out of your current friendships. Also, don't expect your life to automatically change for the better just because you have more money. You're still you, just with a thicker wallet.
posted by ook at 8:22 AM on April 29 [1 favorite has favorites]

Also, I totally agree with Kestrel above-- spread the good fortune with charitable donations! You might like to consider sponsoring a child overseas as a way to celebrate. I did that when I got my financial break, and it's been really rewarding. It's been fun watching her grow up over the past few years, and in a way, I look at her annual photo as a benchmark to look at myself, too- I remember when I first saw her sweet little toddler face in a photo, how things were at work and in my life in general, and every year it's like a little chance to reflect. Plus it's fun choosing sparkly pencils and stickers to mail her, and seeing how tall she's getting.

I chose a non-denominational organization where something like 80% of the $400 yearly fee goes towards helping the kid and her community. They send me a couple newsletters a year about her community, and one handwritten letter, dictated by her mom to an interpreter, with a drawing by the child (she draws kickass fish!) and two photos.

A few years later my income decreased somewhat, to the point that I might not have felt as motivated to make a $400 charitable donation... but honestly, it's like a buck a day. Who can't afford that? Since I had already started, and was invested in the well-being of this little girl and her family, there was no way I was gonna stop. It was a really good decision for me, and I highly recommend it to others.
posted by pseudostrabismus at 8:50 AM on April 29

Lots of good advice above, which I won't repeat.

Write down some thoughts about this, some ideas about who you are, who you want to be, your goals, etc. Stash it away, and revisit it from time to time. It's nice to have some perspective.

You don't have to tell everybody how much more you make. You can say you got a nice raise, and grin, but it's easier to keep your living expenses at 2x current salary if your buddies don't realize you could easily afford more stuff.
posted by theora55 at 10:20 AM on April 29 [1 favorite has favorites]

Only things I'd add to what's already been said:

1. Set aside an emergency fund equal to several months of living expenses.
2. Umbrella liability policy - A big one. You are a "deep pocket" now for tort purposes and fat target for some passing scumbag.

Second the recommendation of Bogleheads. The long-term track record of passive investment cannot be matched by any financial advisor. Head over to their Help with Personal Investments Forum and ask for a suggested portfolio.
posted by pandanom at 10:32 AM on April 29

I'd say the new social environment coming with new job will subtly push you to upgrade your lifestyle and that will be the main challenge against banking a lot of your salary... read Erving Goffmann's "The Presentation of Self in Everyday Society" if you would like to find out more.
posted by yoHighness at 10:46 AM on April 29 [1 favorite has favorites]