Congratulations! You’ve finally received that long awaited and well-deserved pay rise. Your salary has increased! It might not be a huge amount but it’s nice to see management have recognised the good work you are doing. It’s time to celebrate!
Financially you may be tempted to spend big to celebrate or reward yourself, but it’s worth taking a step back and considering how you can make the most of this situation. Parkinson’s Law states that work expands to fill the time available and the same could be said of money. Expenses will generally expand to use the extra salary at your disposal – how often have you enjoyed a financial benefit only to look back later and wonder where the cash went?
If you’re serious about building wealth, it’s important you take steps to ensure this doesn’t happen. Managing a salary increase can be a great way to set up your financial future – after all, if you managed to get by without the money before it is great opportunity not to spend it all now!
So what steps can you take to turn this new-found windfall into a path to financial independence?
- Review Your Debts. Now is a good time to take stock of your debts and determine if you need to increase the repayments. If you’re burdened with HECS debt or personal loans you may be able to shorten the timeframe for repayment. Even a small increase in your rate of repayment can make a big difference to the timeframe you pay your debt off. Jane has a $30,000 loan repayable over 15 years at a variable rate of 6.25%. Even increasing her monthly repayments by just $100 per month can save Jane over $4000 in interest on the life of the loan and shorten its lifespan to under 11 years.
- Add to your savings. Given the high cost of some debt it makes sense to prioritise its repayment to get the best bang for your buck. If you have a small level of debt or no debt at all then building your savings makes a lot of sense. The power of compounding interest can work for you here. For example: Shane invests $100 per month into an investment account that pays 6% per annum return. After 20 years of investing in this way Shane has accumulated over $46000 in savings. Thanks to compounding continuing to invest monthly at this rate will see his nest egg increase to over $100,000. It’s never too late to start.
- Resist Temptation. Having extra money in a transaction account can be a recipe for disaster. To take temptation away have your employer put your extra pay into a separate account that you can’t touch. Alternatively, a lot of banks now allow you to create linked accounts that can’t be accessed by an ATM. Out of sight is out of mind.
- Review Your Spending. Now that your salary has increased and you have a bit more to spend, can you revise how you pay for things in order to save money? Do some retailers offer discounts for upfront or bulk payments? Can you afford to rent a nicer place that sees you at home more, and out (spending money) less?
Now is a great time to review your living costs to see if you can add any more to the amount you are investing. Apps such as Get Pocketbook can allow you to track your personal spending and many such apps will sync directly with your bank account. This can be a good way to review costs and make sure you’re maximizing the allocation of funds towards your financial goals.
If you’re uncertain of how to make the most of an increase in earnings, you don’t have to develop a strategy on your own. A financial adviser (or planner) spends their days identifying and presenting opportunities to their clients. Our simple, quick, free service will connect you to the best financial advisers, based on your needs. Click here to get started.
The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.