Smart ways to manage your salary increase wisely

An increment is a tangible recognition of your hard work and dedication in the workplace, often translating into a boost in your salary or compensation package. While receiving an increment is undoubtedly gratifying, it’s essential to make prudent decisions on how to utilize these additional funds to secure your financial future and achieve your long-term goals.

Salary hikes are crucial for navigating rising living costs and achieving financial goals. While average annual hikes hover around 10%, maximising the impact requires smart planning. Let’s delve into some strategic approaches to making the most of it.

Understanding Increment Funds

An increment refers to an increase in one’s salary or compensation typically given by employers based on performance, market trends, or organisational policies. This additional income presents an opportunity for individuals to enhance their financial well-being and pursue their aspirations.

Also Read: Securing Your Future: A guide to retirement planning in India

What to Do with Your Increment Funds

When salary hikes happen, it’s crucial to have a clear plan in place for utilising the increment funds effectively. Consider allocating a portion of the increment towards essential expenses, such as housing and groceries, to maintain a comfortable standard of living. Additionally, prioritise debt repayment to reduce outstanding liabilities and alleviate financial stress. Allocate a portion of the increment towards savings and investments to build a financial safety net and generate wealth over time.

How Much Funds Should You Invest

The amount of increment funds to invest depends on your financial goals and existing financial commitments. Try to save and invest at least 20% to 30% of your increment towards long-term financial objectives, such as retirement planning, wealth accumulation, or education funding. Consider consulting with a financial advisor to determine an appropriate allocation strategy based on your unique circumstances.

Adhil Shetty, CEO, Bankbazaar.com, says, “While it’s acceptable to allocate a small portion of your raise for discretionary spending, it’s advisable to adhere to a general guideline of saving at least 75% of your increased income. This ensures prudent financial management and prepares you for future financial stability.”

“You can celebrate your career growth, but it’s important not to splurge recklessly and commit to additional recurring expenses without careful consideration. If you already have investment plans in place, simply allocate more funds towards them. For instance, if your salary has increased by Rs 10,000, aim to set aside a minimum of Rs 5,000 for savings, although the higher the amount, the better. This approach will expedite the achievement of your financial goals and fortify your financial position in the long run,” adds Shetty.

How to Make Good Use of Funds

To make optimal use of increment funds, consider adopting the following strategies:

Emergency Fund: Establish or replenish an emergency fund to cover unforeseen expenses and financial emergencies. Aim to set aside three to six months’ worth of living expenses in a liquid, easily accessible account.

Debt Repayment: Prioritise high-interest debt repayment, such as credit card balances or personal loans, to reduce interest costs and improve your credit score.

Investments: Diversify your investment portfolio by allocating a portion of increment funds towards equity, fixed income, and other asset classes to mitigate risk and achieve long-term growth.

Retirement Planning: Contribute to retirement accounts such as Employee Provident Fund (EPF), Public Provident Fund (PPF), or National Pension System (NPS) to secure your financial future and save a comfortable retirement.

Lifestyle Upgrades: While it’s tempting to indulge in lifestyle upgrades with a salary hike, exercise restraint and prioritise long-term financial security over short-term gratification.

Receiving an increment presents a valuable opportunity to achieve your long-term goals. It is important to exercise prudence when needed to reap the full benefits of your salary hikes.