This article was originally published in Financial Express. Click here to read it.
June is finally here, and most of us are either eagerly anticipating or have already received our salary increases and bonuses.
The obvious next question is – “What do you do with your bonus and salary hike?”
If left to our own devices, there is a high chance that we end up spending most of our bonus and hike, with very little saved or invested.
So, what do we do instead?
Here are two simple hacks you can follow to ensure that you strike the right balance between spending your much-deserved bonus and salary hike without compromising on your future savings!
Saving Hack 1: Increase your SIP amount every year as soon as you get your salary hike
Even a small increase every year can make a huge difference to your final portfolio value over the long run.
An increase in SIP amount every year helps you to
- Reach your financial goals faster
- Expand your financial goals (eg afford a sedan instead of a hatchback)
Let’s see how your portfolio looks without an increase in SIP and with an increase in SIP every year.
Assume you are investing Rs. 5,000 every month via SIP and your investment earns a return of 12% CAGR. The value of your portfolio after 20 years would be around Rs 49 lakhs.
Now comes the interesting part. What do you think would be the value of your portfolio if you had increased your SIP say by 10% every year?
The value of your portfolio after 20 years would be almost Rs 98 lakh (vs Rs 49 lakhs) if you increase your SIP every year by 10%.
Over a long time frame (i.e 20 years), your portfolio value when you increase your SIP every year by 10% is almost twice the original portfolio with a constant SIP amount every year!
Here is a table that shows the difference in final portfolio values across different time frames for different % of the annual increase in SIP amount
Saving Hack 2: Invest atleast 50% of the bonus amount as per your existing asset allocation plan
When it comes to your bonus, make sure you set aside atleast 50% of your bonus and invest it back into your long-term portfolio as per your original asset allocation.
Here is how you can deploy your money at the current juncture
- 40% of the Equity amount can be immediately deployed in one go
- 60% of the Equity amount can be deployed in a staggered manner – via weely STP over 3 months
- The entire Debt amount can be immediately deployed in one go
Here comes the good news – You can spend the remaining 50% of your bonus as you please!
Summing it up
So, remember these two simple saving hacks when you get your salary hike and bonus,
- Increase your SIP every year as your salary grows – ideally target to increase your SIP by 10% or more.
- Save atleast 50% of the bonus amount and invest as per your existing asset allocation.