This series covers ‘small inputs’ that can improve how your finances feel day to day.
There are moments during the year when your take-home pay may be temporarily higher than usual, and it has nothing to do with a raise or a bonus. If you max out your 401(k) before your final paycheck of the year, or earn enough to cross the Social Security wage limit, you may have already experienced these little bumps without thinking much about where they came from.
Both situations can cause your take-home pay to increase, sometimes for only a couple of weeks at the end of the year, sometimes for several months. This is especially likely to happen if you’re a high-earner or defer a large percentage of your income to your retirement plan.
I did another post about smoothing out the one-off expenses that might derail us a bit during the year. This is the opposite situation. Like the benefits from being aware and planning for when those unusual expenses might pop up, the same is true for a bump in income.
Anyone contributing a percentage of their paycheck to a 401(k) that hits the max during the year can do a rough estimate to identify how much additional income they can expect with each of their remaining paychecks. Just remember it might not be a dollar-for-dollar increase, since there are likely taxes withheld on dollars that would otherwise have gone to a traditional 401(k).
Someone contributing $1,000 each paycheck to a traditional 401(k) would start seeing $600–$800 of additional take-home pay once they hit the annual limit, depending on their tax situation. If maxing out a Roth 401(k) instead, the increase would generally be the full $1,000, since those contributions were already made with after-tax dollars.
For anyone crossing the Social Security wage limit, the extra hitting your account works out to 6.2% of each dollar over the limit. Every thousand over the limit translates to an extra $62 landing in your account.
Rather than letting that extra amount disappear into general spending, it’s worth identifying it in advance and deciding where it goes. That could be as simple as knowing the extra money that pops up in December will go right toward holiday spending. Or maybe you’ll plan to use it as a year-end savings bump. The point is you have to recognize it to give it purpose.
This is really a narrow version of a bigger idea: money is easiest to direct with purpose before it arrives, while it’s still separate from your regular spending. That’s true whether the bump comes from hitting a contribution limit or from a raise, bonus, or new source of income altogether.
— Brad
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This is meant to help you think through financial decisions and tradeoffs—not tell you exactly what to do. It’s general in nature and not personalized advice (see full disclaimer).