Pay Raise Impact
A pay raise increases your annual compensation, but the after-tax impact is less than the gross amount. A 5% raise on a $65,000 salary is $3,250 annually, but after taxes (roughly 25% marginal rate), you take home about $2,437, or $203 monthly. Understanding this helps set realistic expectations about lifestyle changes a raise enables.
Raises typically range from 3% (cost-of-living adjustment) to 5-7% (merit increase) to 10-20% (promotion). Job changes often yield larger increases than staying with an employer - average increase from job-hopping is 10-20% vs. 3-5% annual raises for staying. Over a career, strategic job changes can increase lifetime earnings by hundreds of thousands.
Use raises strategically for wealth building. The 'pay yourself first' principle suggests saving at least half of raises before lifestyle inflation consumes them. If you get a $3,000 raise, increase 401(k) contributions by $1,500. You still get $1,500 more to enjoy, but you're also building wealth. Automating retirement contribution increases with raises makes this painless and builds substantial wealth over decades.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
3-5% is typical. 3% is often cost-of-living adjustment matching inflation. 4-5% indicates good performance. 7-10% suggests promotion or exceptional performance. Less than 3% means you're losing purchasing power to inflation.
Most companies give annual reviews with raise opportunities. If you haven't received a raise in 2+ years, you're falling behind inflation. Consider asking for a raise or looking for new opportunities with better compensation.
Ask for a raise first if you like your job. Be prepared with market research showing your value. If denied or given inadequate raise, consider job changes - external offers typically provide 10-20% increases vs. 3-5% internal raises.
Financial advisors suggest saving 50-100% of raises. Save at least half to avoid lifestyle inflation while still enjoying improved quality of life. Automate increased retirement contributions so you don't miss the money.
Your marginal tax rate applies to additional income. If you're in the 22% federal bracket plus 5% state plus 7.65% FICA, roughly 35% of your raise goes to taxes, leaving 65% to take home.