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:
|Find & List the Gaps in your Goals||Start Filling the Gaps with Increased Income|
|- List all goals, needs and aspirations
||- Top up the emergency fund
- Allocate to high-priority goals
- Increase allocation to the retirement fund
- Invest for big and small aspirations
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:Non-emergency expenses are easily missed out when you are focusing on very important goals. However, when you get the chance, you should look after them. Listing all your goals will give you a playing field to start allocating. Examples of such goals can be:
|Small Aspirational Goals||Big Important Life Goals||Big Aspirational Goals|
b) Prioritise Goals:The next step is about prioritising allocations. But this time is not the same as a comprehensive financial plan. Because most of your goals have been already prioritised. What you need to understand is the allocation of your increased salary.
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:An emergency fund is supposed to replace your income for six-nine months. If you already have an emergency fund, make sure it keeps up with your income growth. Top it up after each salary hike if need be.
b) Step-Up SIPs:The majority of your investments for long-term goals are SIP based. Where you invest a monthly sum consistently for a pre-defined period. Step up the automatic SIPs for the goals where you need an allocation increase.
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:Don’t forget your retirement planning when you receive your annual increments. Annual increments are reminders that you are one more year closer to retirement. Plan by increasing your contribution to NPS and pension plans. By increasing contribution, you will be able to build the desired corpus faster or build a larger corpus by the time you retire.
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:Staying invested for the long term is a good mantra to follow. But checking your portfolio and reallocating when required is prudential to ensure you weed out non-performing assets. The investment tenure for any investment should match the duration of your goal:
- 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:There is nothing called a free lunch. Almost every investment involves charges that can affect the value of your allocation. Thus, do have a look at the expense ratios of various investments and how they apply, especially for long-term investments.
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:Over-exposure to any asset class or financial instrument is risky. More so if you cannot afford such a loss. Diversify your investments and always focus on the investment tenure. This is important because, with time investment losses can be reversed but if you have to withdraw before the recovery, the money is lost.
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):Are there any steep penalties for premature withdrawals? Does the instrument offer flexible, milestone-based withdrawals? If yes, at what cost?
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.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.