What is the best thing to do in your salary increase? A million dollar question. Many salaried employee fell short on this. Believe it or not, it is one of the crucial decision in personal finance and money management. A small wrong decision may cost you opportunity loss.
What Opportunity Loss?
Every salary increase or any other form of increase in income thru business and sales commissions are big opportunities to develop financial growth. Opportunity will lose if that increase used to increase lifestyle.
To illustrate more here a simple story:
Joffrey is a salaried employee works as a programmer in a big IT company.
In his first year salary, he was receiving twenty thousand pesos monthly (20,000.00/month).
And then, the company where he’s working, declared a salary increase of 10% to all employees of the company.
In Joffrey’s 2nd year, he is now receiving twenty two thousand (22,000.00) pesos monthly salary.
Due to excitement on his new income, Joffrey decided to buy the latest smartphone using credit card on deferred monthly basis of Php2,400.00. A financial deficit of P400.00 a month, an actual financial loss.
For opportunity loss, Joffrey could invest his salary increase in any investment products such pooled funds, stock market, or VUL which also includes life insurance benefits and a potential income of 10% per year.
What Will be the Best Thing To do in Salary Increase?
Here are the most beautiful steps to handle your salary increase:
- Think the salary increase is to beat inflation,
- Upon receiving increase, just maintain your current lifestyle,
- Never use your salary increase to buy immediate gratifications such new smartphone, travels, etc.,
- Accumulate three to six months salary as emergency fund,
- Upon reaching desired emergency fund level, invest the excess!
It’s a regular savings fund accumulated atleast three to six months gross monthly salary. A conservative approach is one year salary fund. The purpose of building emergency fund is for emergency purposes such you lost a job, hospitalization, accident, and other unseen events that may exhaust your other savings.
Build your emergency fund first before jumping into investing. You don’t want to use your hard earned investment in case of emergency!