PAY RAISE – THE DOs AND DON’TsThe appraisal season is on. You slogged for 365 days and have been waiting for this day. It feels like the child who has worked so hard and awaiting results – what percentage?? We re-live these moments every year of annual appraisals. The D-day has arrived and your boss just broke the news, something you have been waiting for, in the last 30 days. “Congratulations!! You have got a raise in your salary.” Ahh!! A confirmation that your boss feels you have done well and the organization still wants you. A raise in salary creates various possibilities of what you can do with the extra cash in your wallet. How to Handle a Raise:A raise is always exciting and suddenly pushes you to make big purchases that you’ve been putting off for a long time. You worked really hard to get the much-deserved raise. Some spend the earned amount. The smart people are the ones who will “MAKE THEIR RAISE WORK for them” instead of spending the entire amount. One will have to balance between spending and making money work. Plan well is the secret to it!!The big question is “What do I do with the extra cash?” The various possibilities that cloud’s one’s mind are as follows:

1. Buy the things you have been waiting to buy for long
2. Pay off debts
3. Borrow more for a long pending holiday
4. Save this extra cash and invest for a bright future

VARIOUS DOs:

1. Wait for a couple of weeks: The news of increase in salary and bonuses is so exciting that for sometime our mind is clouded and we do not think rationally, resulting in some irrational decisions that eventually has a greater impact in future. Many a times we have seen that in the excitement of the raise we end up either spending the entire raise or commit more than the raise. Rather then creating happiness it brings more challenges in life. Be excited and happy that you got a raise. Pause!! Pause for few weeks before you decide what to do with the raise. This will give you time to think and reassess your financial budget and your future plans.
2. Reassess your budget: Before the raise, one may have been living on a very tight budget, and meeting some of your daily needs or expectations was a challenge. The raise was just what you were waiting for. Lets understand!! The raise is normally given to keep pace with inflation and meet your increasing expenses. So evidently one ends up using a part of the raise for the daily expenses. The problem arises when you start spending without thinking and in discretionary areas. Before you allocate the raise for your expenses, it will be good to go through your existing budget and take an objective look as to where you need to add and what you can do without. List out all your expenses (both fixed and variable) such as EMI, rent, electricity, school fees, outings, entertainment as well as amount that you need to save and invest. If you are a habitual user of credit cards, study and review the last 3 to 6 months credit card usage to get an idea of your discretionary spend. Once you review your budget, ask yourself - where is my raise going to work and do maximum good. This exercise will help you find answers, whether you should spend the raise completely on expenses or should you pay your debts or save more.

3. Pay off debts: Life without debt is every one’s desire but very few achieve it. You need self discipline and choose between instant gratification by making some purchases or delayed gratification by postponing the purchase and pay off the debt for a free tomorrow. Once you do the budgeting exercise as mentioned above, taking decisions becomes much easier. By postponing a few not-so-pressing expenses, you can pay off some debt by using the option of increased EMI so that you can reduce the tenure of your loan and get debt free faster. Personally, I prefer to pay off my credit cards debt as they are far more expensive then other debts.

4. Speed up your retirement savings: You managed your daily expenses even before the raise came. Post the raise, once you have reassessed your expenses, it is important to look at your retirement corpus as well. Some of us may not even have started building the retirement corpus. May be this raise is the perfect time to start building the corpus. Ideally a large portion of the increment should be deployed towards your retirement corpus and the balance towards expenses including debt. The following example will give you more clarity to take an informed decision. Assume you have decided to save 10% of your raise and spend the remaining 90%. In doing so, you are basically increasing your standard of living by a much higher percentage than your retirement savings. This will increase the requirement of your retirement corpus and you may not be able to keep pace with your increased lifestyle when you retire. By contrast, if you decide to save 50% of each raise you receive, you will end up saving the balance 50% raise. The end result of this approach will give you the required balance between your savings for retirement and the changed lifestyle.

5. Save and invest: Besides retirement, you may also have few other goals in life that can be short or medium or long term in nature. You may use the raise to plan for those goals by saving accordingly. The goals could be achieved by…Yes!! Know it by now – planning well and saving your raise. For example, you may want to start your own business in the near future and want to build savings to manage your expenses during the period of setting up the business or you want to build for your kids college funds or want to buy your dream car, and…. The wish list could be long!!

6. Time to have some fun: Lets celebrate life! Celebrate the little wins. Have fun because you worked hard for it. A word of caution – make sure that you choose the fun that is in line with your budget. The fun can be buying a new electronic gadget, family vacation or dinner with friends and family, the list could go on and on and on!!

THINGS THAT YOU SHOULD AVOID DOING POST THE RAISE:

1. Don’t tell your colleagues about the exact amount of the raise.
2. Don’t rush in spending the entire raise.
3. Don’t go beyond your budget.
4. Don’t forget that you have debts to clear.
5. Don’t forget to have fun.

 Final Word:A raise if in line with the expectations will always make you feel nice and excited. Sometimes we get carried away as if we have achieved it all in life. Remember you have a long way to go and multiple goals to achieve. Celebrate the achievements. However don’t ignore the fact that you got to put your raise “TO WORK HARD FOR YOU” since you worked very hard to earn the raise. By putting a plan into action, you will not be left with the feeling of “where all that raise go?? Gone with the wind??” Lets keep it with us for long, till the end!