7th Pay Commission: How to make best use of your salary hike

Recently, government accepted the 7th Pay Commission report, which would result in a salary increment for government employees to the tune of 23.55 per cent. Government employees will enjoy an increased purchasing power after this handsome hike.

But what’s the best way to enjoy surplus income after a hike? Should you review your investment planning? Should you settle your debts first? We take a look at some ways to approach the happy problem of having more money in hand.

HOW TO INVEST

It is time to review your investment plans and reset your retirement goals. With your increased salary, you can think of a better retirement than what you had planned earlier. You can now increase your mutual fund investments for greater returns. Since the housing loan allowance has been increased from Rs 7.5 lakh to 25 lakh under the new recommendation, you can plan to invest in real estate now. Also you should now increase your life insurance coverage to match your new income.

If your kids are approaching an age where they may require large funding for higher studies, then make an appropriate provision for it. You can invest in debt mutual funds for secured returns to fund your children’s education.

If you don’t own a home, this is an appropriate time to buy one. With increased salary, your loan eligibility would be higher, therefore you can afford a bigger or better-located property. Additionally, you can get tax benefits from the repayment of our loan principal and interest.

If you are at the starting stages of career, you should invest a larger part of your income. The more you invest at the start of your career, the quicker your wealth would grow at the later stages of your working life. It would also help you tide over the corrosive effects of inflation, and enhance your financial position even if you stand to gain no further increases in income till the next pay revision.

If you have not yet invested in the equity market, you can use your additional income to get direct exposure in frontline stocks to maximize your return. However, you must consult an expert investment advisor to make the right move as it involves high risk when you invest in the stock market.

HOW TO SPEND

Our expenses tend to increase in correlation with increase in income. So why not plan our expenses in advance and avoid over-spending and increase savings?

You should use your income hike to first of all repay your debts such as personal loan, housing loan, car loan, credit card dues and any borrowed funds. Since interest rates are trending low lately, you should make the best of them and not wait till they’ve shot up again since this would mean you pay a larger part of your repayments in interest.

Loans with higher interest rates should be cleared first. These would typically include personal loan and credit card dues and should be repaid on priority.

Control your expenses; if not, you risk losing the benefits of a salary hike. Try to maintain a low-frills lifestyle instead of frequently upgrading it. These would help you curb the need to put your money where there are no returns, be it the clothes you wear, the restaurants you eat at, or the holidays you go on. Those costs will never be recovered, but if you spend and invest wisely, your net worth will keep growing.

KEEP IN MIND

Keep an eye out on inflation as it may neutralise any benefits of a salary hike. Try to increase the amount you invest to match your income hike, and invest in high return assets to beat inflation.

While buying your own home after the salary increase, beware of fixed and variable expenses. Don’t indulge in a buying spree just because you have more money to spend.

Fix your priorities starting with fulfilment of short, medium and long-term goals. It is true that your salary has increased, but it is also true that inflation will increase at some point in the future.

Be ready with efficient tax-planning as now you may need to pay higher taxes. Select your investment instruments to meet your tax-saving requirements.

Investment, clearance of debts, and tax-management should be prioritised. Practising these habits in the long-term would help you enjoy your income better and also boost your net worth.

The author is CEO, BankBazaar.com