Getting a significant pay rise is undoubtedly cause for celebration. Not only is it a sign that you’re doing something right in your work life, but it also means you can have more money to save, use and treat yourself with. It is essential to be sensible with a pay rise and ensure you use your extra cash wisely. It can help to consider your goals, what you want to do with your money and your family’s needs. Here are some of the best ways to manage your finances after a significant salary increase.
Figure out what your new take-home pay is
The first step is to understand how much extra money you can expect to see each month. It is important to note that as your salary increases, so too do your tax contributions. You could use a take-home pay calculator to help you work out exactly how much extra cash you will see.
Decide what your saving goals are
It’s a good idea to decide what your goals are for your extra income. Do you want to buy a car, a house or start a family? Whatever the goal, it is essential to do some research and figure out how much money you will need to achieve this. Then you can compare the amount you need to save with the amount you have coming in.
Increase your retirement contributions
Preparing for retirement isn’t something a lot of us think about when we’re in our younger years. However, it is crucial to keep one eye on the future if you hope to have a comfortable retirement. Consider getting in touch with an expert financial advisor to give you some advice on what you need to do to retire comfortably. It may help to use some or even all of your extra income to bolster your pension.
Future-proof your income
The possibility of your income lowering or even disappearing completely is a common worry. There are many reasons this could happen: accident, illness or redundancy to name just a few. It is important to consider your options should the worst happen. You will need to pay essential bills and expenses even if you are unable to work. This is where income protection insurance can be invaluable.
So, what is income protection? This type of insurance pays out a portion of your typical monthly income, up to 70%. Typically, you can claim this insurance up until the date of your retirement. If you’re keen to have peace of mind that your finances will remain stable regardless of what the future holds, this insurance is ideal. Get in touch with financial experts like Drewberry to find out more.
Save as much as you can
It is often a good idea to save up as much of your additional income as you can. This will depend on your lifestyle and personal circumstances. Consider saving 75% of the additional salary – or all of it if you are able.
Pay down your debts
Debt is common in the UK. Whether it is credit cards, mortgage payments or car financing, it is a good idea to pay down your debts as quickly as you can. The money you earn from your additional monthly salary can be an excellent way to pay down your debts.
Take stock of the debts you have and work out a payment plan to bring them down as quickly as possible. This will help save you paying additional interest on loans and credit cards and can put you in good financial standing for the future.
Make a new budget
Whenever any changes occur to your financial situation, whether it is an increase or decrease in income, it is crucial that you rethink your budget. Re-evaluating your budget is an excellent way to identify how your extra income can do the most good.
It is important to avoid the trap of lifestyle inflation. This is the process where your spending increases to match any increase in pay. Keeping a budget can help keep your finances on track and stop you from sliding down this slippery slope.
Keep a close eye on expenditure
It is a good idea to keep an even more watchful eye on your monthly outgoings after receiving a significant salary increase. Where possible, avoid the temptation to spend outside of your normal limits. It can help to compare your monthly outgoings from before your increase to after. Identify any areas where your spending increased and make a plan to avoid repeating this in the next month.
As mentioned above, it is crucial to stay strict with your spending when you receive a salary increase. It is also important to celebrate your achievement in obtaining a new higher-paid position or promotion.
Consider doing something fun with your extra cash to acknowledge your hard work paying off. You could go on holiday, start saving for a larger purchase you’ve had your eye on or go for a family meal. Whatever you do, remember to have fun and enjoy your accomplishment.