Pay raises and budget adjusting

Posted by Matt

I had my annual review recently and received the happy news that I would be receiving a 4% pay increase. Yippee. So I'm almost keeping pace with inflation. Okay, attitude adjustment...be thankful for what I have and get on with the info.

My family was getting along fine before my "bump", so I decided that we could just stick with that same income level. One of my financial goals for 2008 is to increase my savings rate anyway (especially for retirement), so I signed on to our H.R. website and increased my 401k contribution level from 15% to 19%. (For the detail-oriented among you, yes, I'm aware that contributing 4% of my new salary is going to cost slightly more than I actually get from a raise that is 4% of my old salary, but I figured I should stretch.) This should put me very close to maximizing my 401k contribution this year! Finally!

I just found out that my company automatically monitors my contribution level and if I do ever exceed the maximum, they will make the excess contributions from after-tax dollars to save me from having to take a distribution. The after-tax contributions can be withdrawn tax-free (since I've already paid tax on them, obviously), however, the growth on after-tax amounts is taxed.

Seems like yet another argument to open a Roth account, but I'm still holding out. Maybe I should work on exceeding the income limit so that I can just forget about them once and for all. How's that for a goal?!

For any of our readers that our interested in the benefits of my 20/20 hindsight, I wish I would have accelerated my savings rate faster than I did. Increasing the contribution rate when you get a raise is the least painful way I know of to do it; I probably just wasn't aggressive enough with the size of the increases.