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Getting a hike, promotion, or a raise? How to productively utilize the excess money?

First things first, congratulations! You finally got that promotion you were eyeing for. You put in so much hard work to get that extra money, now it’s time to put money to work for you. 

In general, when you increase your income you immediately start increasing your expenditure and upgrading your lifestyle to match the increased income. But if you keep doing this all the time, you will always have just enough money to live paycheck to paycheck. 

So, instead of spending the extra money to get things that will only give you instant gratification, it is better to use that money towards making yourself financially secure in the long term. 

Here’s how you can do it;

 

Figuring out how the hike would affect your finances

 

Firstly, you need to figure out how much your finances are getting affected by this hike. For example, if the hike is due to switching jobs in a different city or locality, you might need to figure out if the new area is cheaper or more expensive compared to your current living condition. 

Similarly, if you are switching to the same city but to a different location, you need to figure out the difference in commute expenses. All of these are changes in your core monthly expenditure. This can be a positive or negative i.e the expenditure can be lesser or greater than what you are spending currently. 

These are fixed expenditures and you need to account for them as indisposable income.

 

Figuring out the income tax situation

 

If you have significantly increased your salary with the new hike, then you might have changed your tax bracket. This means that you need to figure out a strategy to save on taxes. You might need to increase your investments in tax-saving instruments. Some of these are:

You can also calculate your income tax payable online at the income tax calculators by the government of India.

 

 

Sorting out your basic financial goals

 

This is the next step, you need to figure out your basic financial goals. This means that you need to figure out some key points in what your ideal financial situation should look like. Some questions that you might want to ask yourselves are:

Basically, you need to ask yourself all the relevant questions that will help you understand how much money you would need to live your life comfortably and achieve your financial goals.

 

Finding out your lifestyle goals

 

The lifestyle goal here does not mean that you start planning your walk-in closet or your dream car. This is for people who are currently living extremely below their means and might want to upgrade their lifestyle to live a little more comfortably. Some things to consider here would be, 

It is very important to remember that the purpose of this exercise is to make your life comfortable and not luxurious. A PS5 is not going to be your lifestyle goal here. 

 

Finding out a balance between the lifestyle & finance upgrade that is best for you

 

Once you have your financial and lifestyle goals figured out. You need to allocate sufficient funds for the same. The total expenses of your lifestyle goals should still be comfortably below your means. Once you have that figured out, you can add it to your existing budget and you will have your monthly expenditure. 

For your financial goals, you need to invest. You need to figure out if your current investments can meet these financial goals, if not, it’s time to increase your investments. You should keep in mind the 50-30-20 rule. So, 50% is allocated to your needs, 30% to wants, and 20% to investors. But you should always try to increase the investment part of the equation. 

This is where you would need to do some financial analysis & planning. Click here and here to know more about how to successfully plan your finances as per your requirements. 

Long-term wealth creation gives you the freedom to choose the life you & your loved ones want to live without having to constantly worry about finances. But this also requires a lot of careful planning, discipline, and consistent investment. You can learn more about long-term wealth creation strategies here.

 

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