It is a good idea to reassess one’s savings and expense budget in view of the increased monthly income. However, one should wait and see the actual impact of the hike on net pay.
By now, most salaried employees would have got their annual increment letters. If you are one of those you have been handed over a decent increment for the hard work put in the past year, you might soon have to think what to do with the increased amount that would not flow into your bank each month.
Financial planners say one should carefully plan out one’s finances based on the increment received. “Making the right choices following a salary increase is the most important thing to do. Be careful not to let the immediate feeling of financial well-being can also go to your head,” says Anil Rego, Founder and CEO, Right Horizons told Moneycontrol.
Amar Pandit, Founder & Chief Happiness Officer at HappynessFactory.in says one should have a relook at their budget. "It is a good idea to reassess one’s savings and expense budget considering the increased income. This will help in planning expenses accordingly,” Pandit said.
Here are some money tips on how to deal with the increment:
Anil Rego’s says one needs to wait to see what the increment means for the take-home salary. Here are a few tips from Rego:
--Wait for a few weeks: While getting the increment letter is extremely gratifying, you may be surprised by the actual raise in net salary. A lot of increments are front-loaded in such a way that taxes, provident fund and annual bonus get a large share. Simply wait for two months to understand to see how your increment is getting reflected. This will tell you exactly how much you get to hold on.
--Study your monthly budget: Before you allocate the hike into new expense categories, look at your current budget - spending and income. Were you saving some money pre-increment? How much was going into credit card repayments? Once you know your budget, start thinking about where your increment can do the most good.
--Save and invest at least 50% of increment: Just because you have got extra money, doesn't mean you have the license to spend all of it. As a thumb rule, it’s important to save at least 50% of the increment. This means if your take-home pay has increased by Rs 4,500, you will save Rs 2,250 a month over and above what you saved earlier. Use the new money to earn more money. You can consider investing in mutual funds, insurance, bonds and shares.
--Repay existing debt: For somebody with outstanding credit, the remaining 50% can be used for repaying a portion of the loan. You can ask the financial institution to hike your EMI so that you can repay the loan quicker. Give priority to high-cost debt like personal loan and credit card loan. There is no credit in carrying debt.
--Enhance your retirement, term cover: Since your increment has improved your income, it’s time to enhance the retirement corpus. By keeping aside just a bit more, compounding will ensure your retirement corpus becomes bigger. Also, since your value has increased on account of higher salary, it is time to your term cover as well.
--Don't forget taxes: The true nature of your increment can only be felt when you look at the tax outgo post higher salary. Some employers tweak cost to company or CTC in such a way that your gross salary may go up, but tax outgo increases. This is why it’s important to look at taxes post-increment. You may be required to utilise income tax exemptions more just to avoid paying additional taxes.
--Don't be a Scrooge: Donald Duck was the nephew of stingy Scrooge McDuck, the richest duck in the world. Sometimes in our effort to be rich, we become extremely tight-fisted as the focus is only on saving money. This is counter-productive. If you have got a nice increment, it is important for you spend and share the spoils with your loved ones. Take them out for a dinner, or shower your wife or children with something nice. Just as you should not go over-board like going an impulsive foreign trip or purchasing a new car, it’s important to be balanced and avoid being a penny-pincher.
--Don't take eyes off the emergency fund: In case your annual increment is accompanied by arrears, immediately use the extra amount to boost your emergency fund. Ideally, your emergency fund should have 10-12 times of your monthly liabilities.
--Never forget to invest in yourself: A salary increment is a direct signal that your employer is happy with your performance. The cornerstone of this financial fruit is you. If you do not enhance your skills, the value employers see today may erode. This is it is important to invest in oneself. Assess the competition, and acquire new skills. By getting an upgrade, you will be enhancing your professional value and maintaining your edge.
--Don't assume increment next year will be as good: Good performers are rewarded with good increments, occasionally. However, many employees assume that increments every year will be as good. This can be financially dangerous, because you would have taken on liabilities assuming a certain hike every year. If these hikes don't come off, your savings and investment plan will be in jeopardy.
Amar Pandit of HappynessFactory.in has the following advice:
--Make note of the tax liability: You might move to a higher tax bracket.
--Plan your investments accordingly: As one’s tax liability increases, their investments with respect to tax planning also need to undergo a change to accommodate the increment.
--Add to monthly SIPs: Starting additional monthly investments (SIPs) can go a long way towards relieving pressure in the future and experiencing financial freedom.
--Reassess insurance cover: Assess your current insurance policies and their ability to cover your entire family sufficiently once you experience an increase in income.--Do not splurge: It is highly important to stay wise while undergoing a salary hike. The natural inclination in this situation is to splurge and live in the moment. But prioritizing and keeping future goals at the forefront is of grave importance to ensure a stress-free tomorrow.