A hike in salary is what every employee waits for. At times, these hikes aren’t great and lead to dejection. But often, the raises are large enough to trigger elation.
A salary hike, if used wisely, can be quite helpful in your personal finances.
But before I share my thoughts on how to use it in a financially prudent manner, let me offer a piece of strange advice. Strange because it’s coming from an investment advisor. And what is it? Don’t try to save up all your salary increments.
Sounds odd, no?
But what I am trying to convey is that it is perfectly fine to spend some extra money. You have earned a raise. So, give yourself a toast. If you were waiting for extra funds to take a long-due vacation or purchase something, then go ahead. Do it. Just don’t be too reckless.
And once done, come back to this article and plan how to better use your salary increment going forward.
So here are a few thoughts on how to use your salary hikes:
- A hike can be used to accelerate therepayment of your high-interest debt (like credit cards and personal loans). If you have some outstanding on either of them, then start using the extra money from the salary hike to begin paying off your high-interest dues.
- Time and again you have heard that everybody should have afinancial buffer for emergencies. If you have one of your own, then skip reading this point further. But if you don’t have an emergency fund which is large enough to take care of at least 6 months’ worth of basic expenses, then use your salary hike to start saving for an emergency fund. You can set up a recurring deposit (RD) in the bank or put money periodically in a good liquid fund.
- The above two points can be addressed simultaneously. You can start prepaying credit card dues or personal loans and also parallelly start setting aside some money for emergencies.
- If you don’t haveadequate life insurance, then consider buying a term plan to cover your life risk. Term plans are very affordable and you can easily use some money from salary increments to purchase one for yourself.
- Most people only have corporate-provided health insurance plans. But ideally, you should not depend solely on your employer for health coverage. What if you need to pay medical bills during job transition or during a layoff? So, think aboutgetting health insurance for you and your family as soon as you can.
- If the above few suggestions haven’t already exhausted your extra money, then it is time to increase your investments. I suggest that with each salary increment, you should try toincrease monthly SIPs. By say 5 to 10% once every year or two. This small increase goes a long way in helping you accumulate higher wealth and reach your financial goals faster.
- I am sure home loan borrowers would be wondering why I haven’t said anything aboutprepaying home loan. Yes. That is an option too. If you are one who wants to get rid of your home loan soon, then you can increase your monthly EMI to begin prepayment. This is more so applicable in current times when due to RBI rate hikes, the interest rates of floating-rate home loans have increased abruptly.
- To be fair, you can simultaneously increase EMI and SIPs to address both the above points if your surplus allows for it.
I know going through the list may seem dull and boring to many who generally increase their expenses when their income increases.
No doubt a good hike in salary can make you financially comfortable and help ease things a bit. But you cannot allow your expenses to keep rising with income. Else, you will never be able to save anything for your and your family’s future. Spending a part of your hike is okay. But still, do make sure that you are able to save and invest at least 50-60% of your salary hike.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.