Article

Got Your Salary Increment? 5 Ways To Re-plan Your Finances

30 May 2019

The beginning of the new financial year is when you normally get increments. If the increment is effective on a later date, you also get the arrears. In addition, there may be performance bonus for the period. In short, you are getting a healthy lump sum and you are also going to earn more every month. If you are planning to take off to Gulmarg for a skiing holiday, it is well and good. You deserve the break! But this is also the time to take a serious look at your financial plan and how to use this additional flow productively. Here is how you can go about it.

Look to get rid of high cost debt

From the days of Polonius, debt has been a double edged sword. While it gives you instant gratification, it also exposes you to the risk of servicing that debt. The first step is to use part of the corpus to repay your high cost loans. Normally, credit cards and personal loans are high cost debt and they don’t offer concomitant benefits. Debt reduction should really be your first priority when you get an increment.

Fill the gaps in your insurance coverage

Most of us buy an endowment cover or term cover and forget about it. What is the purpose of life cover? It is to ensure that your family is able to replicate the current life style in your unfortunate absence. Just to give you a benchmark; if your monthly family expenses are Rs.75,000, then you need a safe investment that will earn Rs.9 lakh per year. Your insurance cover, therefore, should be able to manage these expenses for a sufficient number of years. If there are gaps, then use the increment to fill that gap. Also remember the impact of inflation over time.  Do ensure that your assets and liabilities are also insured and don’t forget health insurance.

Create an emergency fund for your family

Have you created an emergency fund for your family? These are liquid assets like cash / bank deposits and liquid funds to meet any emergency. Typically, 5-6 months of your monthly income should be set aside as an emergency fund. There could be a sudden medical emergency, it could be hospitalization, you may need to travel urgently or you may even lose your job. Under these circumstances, a liquid emergency fund is useful to fall back upon. You don’t have to sell your long term productive assets to pay for the exigency.

Revisit your original plan and tick the goals you left out

When you made your original plan, you would have skipped certain goals due to paucity of funds. You may have wanted to save for your child’s higher education or to put your spouse through a professional course. You may have also chosen to put off your exotic holiday. Before you tick these goals, make it a point to prioritize. Whenever you get a hike, don’t miss out on the exercise of revisiting your pending dreams and prioritizing them.

Ensure buffers in your financial plan

Let us understand this point on buffers with an illustration

Goal

Time to Goal

Monthly SIP

Post Tax Yield

Final Corpus

Retirement

25 years

Rs.8,000

13%

Rs.1.82 crore

Child Education

15 years

Rs.5,000

13%

Rs.27.78 lakhs

Old Age Corpus

25 years

Rs.3,000

13%

Rs.68.14 lakhs

The challenge in each of these cases is the assumption of 13% post tax yield. Either yields on assets could go down over time or tax rates could become steeper. Either ways, you may end up with lower corpus at the milestone point. Your enhanced income can be used to invest more so that you build a buffer against uncertainties.

The idea is to get more value out of your increment. As you enjoy your vacation in Gulmarg, also use the cool climes to look ahead with hope and plan towards a rosy future!

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Got Your Salary Increment? 5 Ways To Re-plan Your Finances

30 May 2019

The beginning of the new financial year is when you normally get increments. If the increment is effective on a later date, you also get the arrears. In addition, there may be performance bonus for the period. In short, you are getting a healthy lump sum and you are also going to earn more every month. If you are planning to take off to Gulmarg for a skiing holiday, it is well and good. You deserve the break! But this is also the time to take a serious look at your financial plan and how to use this additional flow productively. Here is how you can go about it.

Look to get rid of high cost debt

From the days of Polonius, debt has been a double edged sword. While it gives you instant gratification, it also exposes you to the risk of servicing that debt. The first step is to use part of the corpus to repay your high cost loans. Normally, credit cards and personal loans are high cost debt and they don’t offer concomitant benefits. Debt reduction should really be your first priority when you get an increment.

Fill the gaps in your insurance coverage

Most of us buy an endowment cover or term cover and forget about it. What is the purpose of life cover? It is to ensure that your family is able to replicate the current life style in your unfortunate absence. Just to give you a benchmark; if your monthly family expenses are Rs.75,000, then you need a safe investment that will earn Rs.9 lakh per year. Your insurance cover, therefore, should be able to manage these expenses for a sufficient number of years. If there are gaps, then use the increment to fill that gap. Also remember the impact of inflation over time.  Do ensure that your assets and liabilities are also insured and don’t forget health insurance.

Create an emergency fund for your family

Have you created an emergency fund for your family? These are liquid assets like cash / bank deposits and liquid funds to meet any emergency. Typically, 5-6 months of your monthly income should be set aside as an emergency fund. There could be a sudden medical emergency, it could be hospitalization, you may need to travel urgently or you may even lose your job. Under these circumstances, a liquid emergency fund is useful to fall back upon. You don’t have to sell your long term productive assets to pay for the exigency.

Revisit your original plan and tick the goals you left out

When you made your original plan, you would have skipped certain goals due to paucity of funds. You may have wanted to save for your child’s higher education or to put your spouse through a professional course. You may have also chosen to put off your exotic holiday. Before you tick these goals, make it a point to prioritize. Whenever you get a hike, don’t miss out on the exercise of revisiting your pending dreams and prioritizing them.

Ensure buffers in your financial plan

Let us understand this point on buffers with an illustration

Goal

Time to Goal

Monthly SIP

Post Tax Yield

Final Corpus

Retirement

25 years

Rs.8,000

13%

Rs.1.82 crore

Child Education

15 years

Rs.5,000

13%

Rs.27.78 lakhs

Old Age Corpus

25 years

Rs.3,000

13%

Rs.68.14 lakhs

The challenge in each of these cases is the assumption of 13% post tax yield. Either yields on assets could go down over time or tax rates could become steeper. Either ways, you may end up with lower corpus at the milestone point. Your enhanced income can be used to invest more so that you build a buffer against uncertainties.

The idea is to get more value out of your increment. As you enjoy your vacation in Gulmarg, also use the cool climes to look ahead with hope and plan towards a rosy future!