How to Readjust your Investments after you Get a Salary Hike?

Getting a salary hike is always welcome and exciting. It is not only financially rewarding but also emotionally pleasing and motivating. But the million-dollar advice is to readjust your investments after you get a salary hike. It is perfectly normal to be tempted to spend this newfound money on material comforts.

Spending a small portion is all right but as a thumb rule, save at least 75% of your raise. So, how do you enjoy your career growth yet save more money in the times to come? Whereas this moment calls for celebration, please don’t go overboard and commit an increase in recurring expenses without due diligence.

Re-calculate your cash flows and reallocate as per the hike.

Here are a few tips to readjust your investment portfolio post a salary hike:

1. Quantify your Salary Hike

At the outset, drill down into details. Get to know which components of your salary have seen a rise and how they look as compared to your previous compensation. Does this increase impact provident fund contribution? With this increase, have you been pushed into a higher tax bracket? These 2 questions are important to ask because both have different implications. Increased PF contribution means a lower take-home salary. You may not be able to up your lifestyle immediately after all! If your tax liability is set to increase, you must explore investment opportunities to reduce the additional tax burden to the best extent possible.

Once you have done your due diligence about how much additional money would you henceforth really have in hand, look at the available options for investing. Saving 75% is ideal, but make it a point to set aside at least 50% for investments. If your investment plans are already in place, just increase the money invested.

For example, if your salary has increased by Rs 10,000 then you must set aside at least Rs 5,000, albeit, Rs 7,500 is ideally recommended. This will help you achieve your financial goals quickly.

Here’s what you need to do to preserve and enjoy your salary hikes and bonuses for a long time:

2. Find and List the Investment Gaps

Life is full of small and big goals and financial goals can be endless. Thus, if you look hard enough, you are likely to find shortages even in the most well-funded plans. However, the purpose of this exercise is not to overinflate your goals, but to ensure that the most important ones do not remain underfunded:

a) List all the Big and Small Goals:

b) Prioritise Goals:

You should increase regular investments to your large goals, as much as possible, at par with the salary growth. If your important large goals are receiving enough funds, you can allocate the balance to other big and small aspirational goals.

For example, your salary hike is 10%, and post-tax it will be approximately 9%. Out of this 9%, first, you need to allocate to retirement and child’s goals. Then to other goals. Also, before anything else, your emergency fund should be priority number one.

3. Start Filling the Gaps

Once you have identified the gaps in your investment allocations, it is time to plug those gaps and stop the leakage of your hard-earned money. Factor in upfront investment charges, asset management charges and even taxes. Some pro tips to help you get planning:

a) Emergency Fund:

b) Step-Up SIPs:

Your salary raise will be wisely and systematically invested this way. If your salary increments are predictable, you may invest in such step-up SIPs for a longer term. This ensures you reach your financial goals within a specific period.

c) Raise Retirement Contribution:

4. Choosing the Right Investment Options

The majority of your long-term investments are already in place. However, here are a few considerations for you.

a) Investment Tenure:

• Long-term goals should use long-term investments for better corpus growth
• Short-term investments are more liquid and offer lower growth
• You can invest in riskier assets for a longer tenure, i.e., equity mutual funds

Example: You can invest up to the age of 99 in Invest 4G ULIP plan from Canara HSBC Life Insurance. The plan allows partial withdrawals after only 5-years of investments, and allocation to both debt and equity funds. Thus, you can use a single plan to invest and fulfil multiple goals ranging from 5 years to up to the age of 99.

b) Cost of Investment:

For instance, most mutual funds and ULIPs have similar expenses. But while ULIP expenses are fixed and not related to your fund value, mutual fund expenses are based on fund value. Thus, as your asset size grows mutual funds become more expensive. On the other hand, ULIPs can continue to charge a limited sum as an expense.

c) Affordable Loss – Diversification:

For example, if you are investing in equities, invest in different stocks. You must buy 500 shares of stock A and 500 of stock B instead of 1000 shares of stock A.

d) Partial Withdrawals (Liquidity):

Salary hikes are something that all of us look forward to. Whereas there is a multitude of options to spend money, it will be wiser to have a wholesome plan that gives you immediate pleasure as well as fortifies your future. Enjoyment is essential, no doubt, but saving money for future expenses and securing your future is equally, if not more, essential.