Insights

Got a Pay Hike? Here’s What You Should Do

April 30, 2018 . Gourav Kumar

It’s that time of the year again. We are all waiting for our appraisal letters and ratings to find out how much our salary is going to increase this time. Whether you get an annual bonus or not, whether you get a small increment, or a fat one, whether you continue in your existing position or get a promotion, one thing is for sure, you will have a higher income. While it would be tempting to go on a spending spree with the new found money, It would be worthwhile to look at your investment plan as well. Here’s what you can do to make the most of your increment.

Pay off your loans

If you have high-interest loans like a personal loan or a credit card loan, you should increase your EMIs to pay it off early. These loans carry a high rate of interest which surpasses the returns your investments can generate. Hence it is a good idea to pay off these loans before you make investments.

To put this in perspective, suppose you have a personal loan @17% p.a. At the same time, your FDs are earning say 7% per annum. You will clearly do well to deploy the money in repaying loan since you will effectively gain 10% by attending to the loan repayment first and freeing up your monthly cash commitment towards the loan.

Start tax-saving early

Every year, we notice a sharp increase in investment in ELSS funds during the months of December to February. This is the time when employees need to submit their investment proofs to their companies. Hence they flock to make last minute investments into tax saving instruments. This style of investment can be detrimental to your portfolio’s health. Lumpsum investment in equity schemes are not recommended as you might end up catching a high and losing money.

So this year, start an SIP in an ELSS fund from the very beginning of the year. The limit of deduction u/s 80C has been retained at Rs. 1,50,000 for this financial year. Reduce your provident fund deductions and insurance premium from the 80C limit. Divide the remaining amount by 12 and start an SIP for this amount right away.

Step up your SIP

As your salary goes up, it is important to keep increasing your SIP amounts as well. Increasing your SIP amounts periodically ensures you reach your goals in a timely manner. Considering a constant growth rate of 12%, an investment of Rs. 10,000 per month will grow to Rs. 93 Lakh in 20 years. But if you keep increasing the investment amount by Rs. 1,000 every year, your investments will grow to Rs. 1.49 Crore!

Here’s an example of how your investments would have grown in a step-up SIP vs. a regular SIP. The graph below shows the impact of increasing the SIP amount by Rs. 1,000 every year in Aditya Birla Sun Life Balanced 95 Fund.

regular_vs_step_up_sip

This illustration is based on a SIP investment of Rs. 10,000 started on 1st January 1998 and run for 20 years in Aditya Birla Sun life Balanced 95 fund (taken only for illustrative purpose). The values are as on 1st January 2018. In a regular SIP, you would have invested Rs. 24 Lakh and gotten Rs. 2.17 crore, whereas in a step-up SIP you would have invested Rs. 46.8 Lakh and gotten Rs. 3.06 crore. As you can see, the modest increase has made a significant difference in the final value.

The beginning of the financial year is the best time to review your financial plans. You can take corrective actions, invest any bonus you might have received and plan out your finances for the next year taking your hike into account. Don’t miss this opportunity to reach your goal.

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