Getting a raise is good. Not just financially but also psychologically, as it is a morale booster.
If you aren’t an ultra-frugal person, then I am sure your mind will come up with thousands of ideas about how to spend this raise. This is natural.
Don’t try to save it all. Yes. You heard it right.
It’s ok to spend some extra money after you get a raise. Go ahead. Treat yourself a bit. The occasional splurge is good. Do it. And if it means buying that expensive device that you were waiting for, then so be it. So, how much should you spend?
There are no right answers here, but try to save at least 50-75 percent of your raise.
Using the raise judiciously
Why I want you to save something is because lifestyle creep happens without you realizing it. So, while it's ok to set aside some amount to spend on things you want to, you don't want to get into the habit of consistently spending more and more after each raise.
Spending is fine. But make sure you're not spending more just because you can. So keep a limit of sorts that you will not spend more than 25-50 percent of your raise.
That leaves you with 50-75 percent more.
Here is when the investment advisor in me takes over and shares some unsolicited advice:
-If you have a credit card (or personal loan) outstanding that you have been unable to clear off in full, then first of all use the extra money to repay quickly. Credit card interest rates are financial killers that charge up to 40 percent in annual interest.
-Emergencies don’t wait for you to have an emergency fund. And the pandemic showed us how we can be punched right in the face. So, if you have an emergency fund, then you can top it up to make it larger. If you have a six-month reserve, then gradually scale it up to nine months or so. But if you don’t have any emergency savings, then please begin doing so immediately. Don’t wait for emergencies to catch you off guard.
-Check your life and health insurance policies. If these aren’t adequate, then consider increasing them soon. This will mean increased premiums and you can easily handle that as you got a raise recently.
Stepping up investments
With the above things taken care of, you now have a shot at increasing your savings and investments. Since you will consistently have more money every month, you can consider increasing your SIP every year by, say, 5-10 percent. As a small example, let’s say you start with Rs 20,000 monthly investment. Assuming 11 percent average returns, you will have about Rs 91-92 lakh in 15 years. But if you are able to increase this monthly investment amount by just 5 percent every year, you will end up with Rs 1.20 crore in the same time. This is how periodically increasing your SIP helps you reach your goals faster.
-You can even begin saving for that other important goal that was not on your radar till now due to the lack of surplus. But whatever you do, don’t just invest randomly here or there. Make sure you have a goal-based approach and increase your investments accordingly. A raise can be just the right trigger to fill a gap in your investment plan.
-Should you repay your home loan soon? One option to utilize the surplus from your raise is to use half the sum to increase the EMIs (i.e. begin prepaying home loan). The remaining half must be used to increase ongoing investments. But remember that prepaying helps earlier in the tenure.
-There is another thing to consider. You have the extra money now to upgrade your professional skills further. This might help you earn much more in the future.
A good salary hike (due to an increment or job switch) can make your life comfortable. But beyond a point, don’t go on an extended binge to spend it all. If you use your increments wisely, it will not only help you strengthen your finances, but also help you grow your wealth by surprising proportions in the long term.