A salary increase is normally a reward in recognition of meeting the expectations of your employer through hard work and extra effort. Many people use this additional income to reward themselves accordingly.

It is important that any decision to spend the additional monies on lifestyle related expenses is balanced with the need and benefit of repaying debt (such as a home loan or credit cards) and/or using the funds for further investments.

To determine this balance, it is highly recommended that you take the time to complete a cost benefit analysis before you part with this hard-earned “cash”. Try to determine adequate portions for investment, paying off debt and or providing for other lifestyle expenses, thereby stimulating a desire to achieve short, medium and long-term financial goals.

If you do not take an active role in putting the additional money to good use, then you are more inclined to simply find it all disappearing into lifestyle-related, consumable expenses that do not necessary assist you in achieving your overall financial goals.

Draft a budget

Drafting a budget is the best-guess estimate of your income and expenses for the year. A budget lets you understand how to get the most out of your money and helps you resolve further problems. Many people do not know when they are about to get into financial trouble until is too late because they do not have a financial plan to know where they are now. A budget maps out where the money is going to and as such it can be used as an indicator when trouble first appears. Many people think a budget is a spending plan, yet it is actually a prosperity plan because it helps you plan for a prosperous future.

How is this done?

    • Make a list of what matters to you and then put your values in order
    • Write down your goals and think of what you want to achieve financially
    • Look at your pay slip and note your net income
    • Add any additional income you may have to determine your overall income
    • Determine your expenses
    • Know your surplus/deficits
    • Invest or work on minimising the risk.

Clear your debts

Using your increase to pay off your debt is not only a wise move, but it feels good when you clear a debt. A good way to start would be to look at your short-term debts or debts where you have a small balance remaining, and pay these off, thereby saving on the interest as well as freeing up the cash you were using to pay these debts to settle other debts or, even better, putting yourself in a position to invest wisely.

Build up your emergency fund

Once your debts are cleared, it is recommended that you set up an emergency fund as well as do some smart investing. Most financial experts recommend that you have three to six months of living expenses set aside in an emergency fund. What many people do not often realise is that, in most cases, six months of expenses is actually quite a large amount of money. To work towards achieving this goal, if possible try to live off your previous income amount as this will enable you to invest your salary increase each month, thereby speeding up the time to save an amount equivalent to six months’ living expenses.

Boost your retirement savings

Another prudent use for the increase would be to consult a financial planning professional who could assist you with advice as to the best retirement investment vehicle for you. Ultimately it should be part of everyone’s financial long-term goals to adequately fund for their retirement.

Remember that once you retire, for most people, it becomes difficult to earn the same amount of money that you earned prior to retirement. This means that unless you have funded sufficiently for your retirement by using, for example, as much of your increase as possible through the years, you may run the risk of running out of money.

Double check your insurance coverage

Do you have enough insurance coverage? Far too many people find themselves underinsured in many aspects of their lives. By ensuring that you have sufficient cover, you are minimising the risk of having to “dip” into your savings and or investment for unforeseen expenses, as well as increasing the risk of using your increase to fund the loss, rather than investing the excess income.

Splurge on yourself a little

Do not spend your entire salary increase by purchasing things for yourself that do not mature in value. It is important though to reward yourself as the increase is normally a reward for hard work. Many financial experts recommend taking a small portion, such as 10%, of your raise or any year-end bonus you earn and spending it on something for yourself. Doing so will help you stick to your other plans for the rest of the money. This is similar to having a cheat day on a diet. If you are too strict with yourself and how you spend your money, you will be more inclined to fall off the wagon and resent your new financial goals.