Half of your salary hike should go towards future

The joy of getting a salary hike is always accompanied by the desire to splurge. The choices are unlimited. A new phone, that luxury vacation you’ve been planning forever or partying – but is it a good idea to always spend on present desires?

While it is alright to reward and gratify yourself, do also spare a thought about your financial security in times that will only get more uncertain. In other words, it is a good idea to invest and save a part of your hard earned increment to secure your financial future.

An increment means two things for a person:

• An improvement in one’s present situation and lifestyle

A person may want to, let’s say, move closer to his or her office because the commute is horrendous or he or she may want to get a car now because they just got married. An increment can help people make their present lifestyle better by varying degrees, depending on the increment itself.

• The ability to reach long term goals faster by investing more

Alternatively, a person may wish to stop working at his or her day job and pursue their lifelong dream of traveling the world or helping the underprivileged. If a person has already started saving and investing for this dream, then an increment can help them get there faster if they increase what they invest every month.

Is there a middle path?
It becomes important to find a balance between taking care of one’s present and one’s future. Therefore, 50% of an increment can go towards making the present better and the remaining half can go towards bringing one’s future dreams closer to reality, faster. Saving and investing can be done for a number of purposes. It may be to meet one’s immediate needs, needs that can arise a few years from now or those needs that are more than a decade away.

So where should the money meant for the future go? It may be confusing what one should invest for, especially if a person is just starting out. How to invest or what instruments to invest in can be another confusing issue. Considering that most of us don’t nearly have enough to save for all needs at the same time, the following order can help us decide what we should save for first:

Money for unknown and sudden emergencies
The first thing that one should do, is to set aside a portion of his/her salary, as much as they can, but at least 20%, for an emergency fund. Emergency funds are designed to help people deal with the unexpected. An emergency fund is typically around three to six months of living expenses. Loss of income due to sudden unemployment, health related issues that medical insurance wouldn’t cover, etc. could easily cause financial stress.

Money for goals that are coming up in the next 5 years
Of the savings a person has every month, it is advised to put half or more in a portfolio of Debt Mutual Funds or even a Recurring Deposit.

This amount is meant for short term goals such as travelling or buying a vehicle. It’s likely that this amount will be used as new short-term goals will keep arising. One will need to keep replenishing this amount.

Money for long-term dreams such as retirement
After money that has been saved for the short-term goals, the remaining half of the savings can be invested in long-term focused instruments such as equity mutual funds. A smart way to start with equity investing is to invest in tax saving mutual funds or ELSS funds.

This way a person can save tax and also invest for the long run. It is advisable to start an SIP so that some amount of money is earmarked and allocated for the future.

To conclude, we can see how money ought to be earmarked according to the kind of needs it is intended to be utilised for. These needs can be unexpected or planned. Either ways, for a financially healthy and secure tomorrow, it is advisable to set aside at least half of a salary raise for one’s future.

(The writer is CEO and co-founder of Scripbox)