Increment time…what shall we do….

JUNE…..this is the time when we all are very excited with regard to bonus, increment or appraisal we all are expecting. We are expecting that appraisal to be in single digit because of the slower growth rate of the corporate sector. But whether the appraisal is in single digit or double digit, one should think of what to do with the extra money which is being received. Here is what one can do:

   1.Reduction in debt/loans

   It is always prudent to reduce the debt we have so if one has personal or car loan, it is always advisable to pay it off and reasoning is why to pay high interest? Out of all, credit card loans to be paid first as it carries the high rate of interest. But, we also have financial goals to be achieved and same is also to be kept in mind when we get additional money.

   How to work on it? It would be a good idea to consume 50% of increment and increase the EMI (equated monthly instalment) and the other 50% for investments. The former will help one to get out of vicious circle of debt as soon as possible and the latter will help one to reach your goals.

   2.Increase rate of savings

   If one is struggling to meet his/her financial goals, one can use extra savings to increase savings. Earmarking monthly increment to fill the gap (the amount needed to fulfil a goal) is a prudent decision. Annual increase in allocation strengthens the financial life. One should look at allocating at least an annual increase of 10% in investments. That way with the increments, one will increase his/her net worth. The increment is ideally suited for a new or additional SIP as it arrives every month. Using the SIP approach, one can invest in equity markets with confidence, reducing volatility and making best of wealth creation potential of equities.

   3.Lifestyle improvement

   With high income levels, we all aspire for more. It is a most common query I come across as to whether to improve lifestyle with increase in come or not. The easy answer to it is whether we are able to achieve our financial goals comfortably without increasing our allocation with additional money. If yes, then it is right to improve your lifestyle, go for holiday, buy new car, etc. One can also create a Holiday Fund with the extra savings using SIPs (systematic investment plans).