Everyone gets pleased after getting an increment at work. As soon as you get it, it is normal to spend the salary increase as you have worked hard to get it. While it’s important to reduce your stress and do what makes you and your loved ones happy, industry experts say, one should also be careful never to overspend.
Here are some tips on how to deal with the salary raise:
1. Save and Invest at least 50 per cent of the increment
When you get your salary increment, it doesn’t mean you spend all your excess money. Vineet Patawari, Cofounder CEO StockEdge and Elearnmarkets.com says, “As inflation rises and things become expensive, one should save at least 50 per cent of the increase.” For example, if there is a hike in the salary by Rs 5000, you should continue to save an additional Rs 2,500 per month.
He further adds, “One should utilize the new funds to increase income by investing in the financial assets.” For instance, you can consider investing these funds in bonds, stocks, mutual funds, and insurance.
2. Enhance your Retirement Term Cover
It’s time to increase the retirement corpus now that the raise has increased your income. Patawari explains, “Compounding will ensure that one’s retirement corpus grows if the investor saves a little bit more money. Additionally, one should also renew their term cover because one’s value has improved due to his/her greater wage.”
3. Boost your emergency fund
If one’s annual increment is accompanied by arrears, according to experts, immediately use the extra amount to boost your emergency fund. You should use the extra money immediately to increase your emergency reserve if delays accompany your annual raise.
Patawari says, “One should note that emergency reserve should ideally be 10–12 times as large as one’s monthly obligations, which should be accumulated over time.
4. Add to monthly SIP
Beginning more systematic monthly investments (SIPs), experts say can significantly reduce future pressure and help you move towards your goal of financial freedom.
5. Higher tax bracket
Note the tax liability as you might move to a higher tax bracket. When there is an increment in your salary, then your tax bracket can also increase. So, make a note of the tax liability when your salary increments, and accordingly make the right investments.
6. Enhance your professional skills or acquire new skills
It is always important to invest in yourself first. “As one’s salary increases, he/she should try to enhance their professional skills or acquire new ones.
It is crucial to be sensible while getting a pay raise. Patawari points out, “In this circumstance, one’s natural impulse is to indulge and savour the moment. But setting priorities and keeping long-term objectives front and centre are crucial if one wants to avoid future stress.”