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What a Pay Raise Means
Congratulations: You just got a new job and a 20 percent pay raise. So how much more
are you actually taking home each week? And, if applied to your debt, how much quicker could you reduce the balance?
Suppose your increase takes you from $40,000 to $48,000 a year. After taxes
are taken out--28% percent for federal, about 5 percent state and 7.65
percent Social Security--you'll wind up with $5,540 more a year, or about
$97 more a week. That means you'll keep a little less than 70% percent of
your raise. If, on the other hand, you go from, say, $60,000 to $72,000 a
year, the story will be different. Your federal tax bracket will bump up to
31 percent from 28 percent. Result: You'll come away with about $5,685 more
a year or $109 a week. This means you would keep just over 47 percent of
the raise.
"A pay raise isn't always what it seems," says Jeffrey Levine, a partner with the Newton, Massachusetts, accounting firm of Alkon & Levine. Despite the tax bite, the impact of a raise on your debt can be significant. That is if you use it to pay off what you owe and not on a closet full of new shoes. See for yourself: Find out how to shorten the length of your payment horizon by applying your raise to your debt. Next: Your Best Investment >
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