It’s that time of the year when performance appraisals usually happen. If you got a salary hike during the latest appraisals, congratulations! You must be excited to think about how you are going to spend this extra money. But before you plan for your next vacation or a big-ticket purchase, pause…and take a step back. This surplus money can actually make a huge difference to a number of important things. We have a few smart suggestions:
1. Get rid of piling debt
If you’ve been struggling with some form of debt, your increased salary is perhaps your best bet to get rid of it. Debts, especially the ones that involve steep interest charges like credit card debts and personal loan dues, snowball in no time. So, using your incremented salary to clear your debts as much as possible is a really smart move.
Start with making a list of all that you owe, noting down the interest charged by each one. Then begin your counter-debt plans by clearing the debt that charges the highest rate of interest. Doing so makes a lot of financial sense. However, you can also start with getting rid of the smallest debt first, and then move on to the next bigger one, if that helps you regain self-confidence. Clearing your debt will not just give you peace of mind and improve your financial health, but will also help to better your credit score.
2. Start setting up an emergency fund
Emergencies arrive unannounced. And our core saving is often the first casualty while taking on unexpected events like a sudden job loss or a family emergency. Precisely why an emergency fund is a great way to safeguard your savings and investments. So, use your incremented salary to build one if you haven’t done so yet. Ideally, an emergency fund should have at least 3-6 months’ worth your expenses parked in a savings account for quick accessibility. You can also set up a fixed deposit with the same amount and let it grow over time, and break it in the face of an emergency after losing just 1% of the interest value.
3. Get adequate health and term insurance cover
If you think you don’t need insurance, think again. What if something untoward happens to you and you’re unable to work? How will you fend for yourself? How will you be able to take care of your family?
This is where insurance comes in. It’s the safety net that can break your fall. If you haven’t already signed up for a comprehensive health insurance plan or a term insurance policy, you’ll be well-advised to use your incremented salary to get them with adequate coverage. This will be a great way to secure your financial future and that of your loved ones. Plus, insurance plans help to reduce your income tax burden too. A perfect win-win situation, right?
4. Upgrade your skills
You already have an education. You have a job. But don’t stop at that. If you want to grow in your career, you need to upskill yourself. Use the extra money to enrol into a professional course or a useful certification programme that will help you enhance your skills or learn new ones. This can help set you apart from the rest of your peers and lead to better-paying promotions or other lucrative job opportunities. An additional degree, an extra diploma, or a certification can help you climb the corporate ladder faster. That’s what you call investing in yourself, something that will surely reap rich dividends.
5. Build your investment capital
Investment is crucial to growing your wealth. So, channel your increased salary towards building your investment capital. But before you start your investment journey, make sure your financial goals dictate your investment choices, and you’re completely aware of the expected returns, risks involved and the tax component attached to each investment instrument. As such, leave no stone unturned when it comes to researching your investment options.
Some of the common investment tools that you can consider include fixed deposits, recurring deposits, Public Provident Fund (PPF), Systematic Investment Plans (SIP) for investment in mutual funds (or in an ELSS fund for tax-saving under Section 80C), National Pension Scheme, so on and so forth.
That being said, it’ll be worthwhile to reiterate that you should set precise financial goals (like building your home’s down payment fund in the next 3 years) and invest in such a way that you can meet them within the set time-frame. Directionless investing often adds to the confusion. Also, it’s better if you keep investing throughout the year than making last-minute mistakes.
6. Go ahead, have some fun!
It’s obvious that you put in a lot of hard work last year as a result of which you got an increment. So, go ahead, have some fun with the additional income, but only once you’ve ticked at least some of these important boxes.
These smart steps will go a long way in securing your financial base and is much better than losing it all on frivolous things. So, make the most of your increased salary, as there’s actually no guarantee you’ll get a good hike every year. They say “make hay while the sun shines” for a reason.
(The author is the CEO of Bankbazaar.com)