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Got a salary hike? Here's how to handle your finances

While this is cause for celebration, it’s important you don’t get carried away by the situation. Here are some tips to make the most of this opportunity.

So, you got the much-awaited pay hike. Congratulations! Your company is happy with your performance, and they have let you know. While this is cause for celebration, it’s crucial you don’t get carried away by the situation. Here are some tips to make the most of this opportunity.

1. Do a reality check

First of all, approach the HR and find out the complete break-up of the salary after the increment and compare it with your previous salary. What component of salary has increased and what are its tax implications? Tax, provident fund contributions reduce your monthly take-home salary. It is essential to, therefore, give at least two months, to find out the real boost to your take-home salary. Moreover, if you have shifted to a higher tax slab, it might call for more investments to reduce tax liabilities.

Part of your increment could be earmarked for repaying expensive loans – credit card and personal loans. You could talk to your lender and request a higher EMI on your loans to repay it faster. Credit card loans carry an interest rate of 40-45% p.a. while it is about 20% p.a. for personal loans. Repaying them will save considerable interest on such loans.

2. Ratchet up your investment

Once you know the actual increase in your monthly income, allocate about 50% of it towards your existing financial goals - be it retirement or children’s college education. For instance, if your monthly salary has increased by Rs 10,000, bump up your investments by Rs 5,000. It can not only help you achieve a larger corpus but also help you achieve your financial goals faster.

Consider this, Rs 20,000 invested every month gets you a corpus of Rs 94 lakh at the end of 15 years (assuming you invest in equity funds giving a return of 12% pa). Adding Rs 5000 more every month will help you achieve the above target amount in less than 10 years. And letting it accumulate will increase corpus to about Rs 1.2 crore at the end of 15 years.

Salary hike is ideally suited for a new or additional SIP as it arrives every month. Moreover, by automating your investments through the SIP mode you are ensuring market volatility doesn’t affect the wealth creation potential of equities.

3. Repay expensive loans 

Part of your increment could be earmarked for repaying expensive loans – credit card and personal loans. You could talk to your lender and request a higher EMI on your loans to repay it faster. Credit card loans carry an interest rate of 40-45% p.a. while it is about 20% p.a. for personal loans. Repaying them will save considerable interest on such loans.

However, you need not rush to repay home loans or educations loans as you get tax rebate and their interest rates are only marginally higher than what you could potentially earn from your equity investments.

4. Build an emergency fund

 If you haven’t yet built a robust emergency fund, the right time is now. On average, your emergency fund should be worth about four months of income.

5. Invest in yourself

You have got an increment because your employer is happy with your performance. To keep the competitive edge, you need to upgrade your skill-sets and enhance your professional value. So, ensure part of the money goes towards attending workshops and courses that will keep you ahead in the corporate world.

6. Don’t forget about charity and fun 

Higher income also means now you have the opportunity to donate more for the cause that’s closer to your heart and that too in a tax effective way. Sec 80 G contributions are eligible for deductions up to 10% of the donor’s adjusted gross total income. While you are doing all this, ensure you are not missing out on the fun. A salary hike is a cause for celebration. Pat yourself on the back for the hard work done and go for dinner with friends or bring home that iPad that your daughter asked for.

In the end, as you bask in the glory of a job well done, it is critical not to lose sight of the long-term financial goals. Invest as much as possible towards achieving your goals while reducing costly debt.

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