Know how to optimally utilize a pay hike or annual increment


You have received a hefty raise at the beginning of the financial year or during the festive season. So, what will you do with the additional amount? The article discusses some ways to effectively utilize the excess amount received in the form of increment. Read to know.

You have worked hard. You have worked sincerely throughout the year. Now, after evaluation of your performance, the Company has given you a hefty raise. Your pay package has improved. Now the next question comes. How can you properly utilize the hike to your maximum advantage? The article is trying to sort out the issue and provide you with some ways to effectively utilize the extra pay which you will start getting.



Take a term insurance or accident insurance

Have you taken a term insurance. It is an absolute necessity. If not, please take a term insurance at the earliest. The yearly premium is negligible. But a term insurance with adequate cover will be a protective umbrella over your dependants.

If you have already taken a term insurance, then go for an accident insurance or health insurance for the entire family. Pay the half-yearly/annual premium with the hike. It would be immensely beneficial at the time of emergency.

Pay the loan with a high rate of interest

Did you take any personal loan? Do you have a large amount of credit card loan? These loans have a huge rate of interest. So, with the pay hike, try to pay back the loan, if not fully, at least partly. In many cases, young men and women invest the excess money. But, if the loan carries heavy interest and does not have any tax benefit, then it would be prudent to pay back the loan (either fully or partly).

Plan to acquire a new home

If you do not have your own residence, then plan for a new home. Now that your pay package has improved a lot, you are eligible to get more home loan. So, think about this option. You can take a home loan and start paying the EMI. In my opinion, this is the best way to utilize your pay hike.

If you have already taken a home loan, then you must increase the monthly EMI to be adjusted from your pay hike and cut down the tenure of the loan. This will have tax advantages also.

Start tax-saving immediately after the hike

Now that your pay has increased, the tax payable would also increase. So, what should you do now? Utilize the hike/increment to subscribe an ELSS. Don't wait for the last minute. The market may not be that favorable at the last minute. If you subscribe an ELSS immediately after the pay hike, you can do a better search and chose a good ELSS, whereas at the last minute you may not be able to do extensive research before subscribing.



Increase your SIP

If you do not have any substantial loan, or you have already taken a home loan or term/accident insurance, then what should you do with the pay hike? In such cases, go for increasing the SIPs in the mutual fund schemes where you have been already investing. From the well-known theory of compounding the money, we know that if we increase 10% of SIP. In the long run (say 10-12 years), there will be an accumulated increase of 20-25% of the accumulated amount. This would help the growth of your retirement corpus leading a comfortable retired life in future.

Final few words

Summing up, I must say that every person must utilize the hike in pay very prudently. The hike can be utilized to acquire an immovable asset, to save tax, to ease off the burden of unnecessary loan taken earlier, to build up retirement corpus or to have term/medical insurance. Now, chose prudently what will you do with your annual increment.


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Comments

Author: umesh26 Jul 2018 Member Level: Diamond   Points : 4

Now a days the market is full of luring and attractive gadgets for household as well as personal use. We, in our hurry and haste, many times go for these items only to find later that they are either redundant in our house or of no use to us.

In such a situation it is very necessary to avoid the unnecessary indulgences and keep a control on our whimsical shopping sprees.

The hard earned money got due to a raise or occasion is not to be wasted and is to be utilised for prudent investments which can give a good return, in the long run, to help in discharging the responsibilities towards the education of the children or other important and useful personal wants.

Author: dipti07 Aug 2018 Member Level: Silver   Points : 4

This is a very pertinent article taking all aspects of financial planning into account. We all get very happy when we receive a large corpus of funds at a go. But not many would know how and where to use these funds to get optimum benefit. The author explains various options taking into account the various financial needs common to all of us. He is very prudent to talk about a life cover first as death is unplanned and can knock at any moment. Having been covered for life, the next priority should be reducing loans as much as possible. Moving on we could accumulate a down payment for a house and take on an EMI burden or simply invest in SIPs.
Whatever we choose to do should be wise and well thought of. Anyone who needs to make such a decision can refer to this article and get an idea and decide according to his priorities.



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