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Getting a salary hike is possibly one of the best feelings in the world as, after all, it boils down to your boss saying, “You deserve to be compensated for your hard work”. But increase in salary could become a double-edged sword. As the feeling of financial well-being could go to your head and lead to some poor financial habits.
However, the trick is to think about how you can benefit from your increased earnings. While its essential to enjoy the success that hard work has brought you, do remember the importance of growing your net worth while deciding what to do with a raise.
So, when you get a salary hike, consider the following four ideas for that hard-earned money:
- Review Your Term Insurance Cover
While it’s incredible making arrangements for things on which you want to spend money post salary hike, you must not miss out on guaranteeing a secured financial future for your family.
One of the main things you must do after getting an increment is reviewing your term insurance cover. The reason is- increase in income eventually leads to higher household expenditure and a better lifestyle, which will continue even in your absence. Therefore, to ensure that your loved ones continue to lead their lifestyle even when you are not around, review your term insurance cover.
Term insurance is the most fundamental type of financial security which gives you considerable life coverage at an affordable premium. Typically, your term cover should be 10 to 20 times your yearly wage.
- Achieve Your Life Goals with ULIPs
With the increase in income, your life goals may change. For instance, you may now plan towards accumulating a larger corpus for your retirement or look for better options for your kid’s higher education. Therefore, it’s vital to increase your investments to address such changes. Put simply, use the additional income to grow your wealth.
One way to do so is investing in Unit-linked insurance plans (ULIPs). A ULIP plan not only provides you with a life cover but also helps in wealth creation. In case if you have already invested in a ULIP plan, now is the good time to top-up your investment with the additional money. ULIPs also offer an option to switch funds depending on the market environment, and their tax efficiency is an added advantage that helps you to expand your wealth.
- Wipe Out Your Existing Debt
If you are working to paying off any debt, then when you get a hike it could be a great time to fast-track your efforts. Whether it’s your student loans, car loan, or even a credit card bill, the simplest way to build a positive net worth is to eliminate such debts. Though reducing your debt load may not give you the instant gratification, but it can surely reduce your stress and make for a much healthier financial picture.
You can start by paying off the smallest debt first and then move onto the next one. This exercise will help get rid of small interest charges that weigh your budget down. Moreover, the motivation of paying off debt is sometimes all you need to tackle it.
- Plan for Taxes
Remember the fact that with an increase in salary you enter higher tax slabs and therefore there is an increased tax deduction. More taxes owing to salary raise are inevitable, however, you can reduce your tax liability if you invest wisely enough in tax savings financial instruments.
When you choose to invest in ULIPs or term plans, you not only build wealth or secure the financial future of your dependents, but also reduce your tax liability. Because the premiums paid towards these investments qualify for tax deductions as per income tax laws. You can claim a maximum tax deduction up to Rs. 1.5 lakhs.
As you bask in the glory of landing a raise, planning for your future should stay in the forefront of your mind. You have worked hard to earn your raise. So, make sure your money is working as hard as you are. By putting a financial plan into action, you won’t be left scratching your head and wondering where all that money went when the end of the month comes.