What’s the first thing someone should do financially after getting a raise or promotion?
First and foremost, update your budget. You need to know what you are working with to ensure you put this new money to the best use.
Once you have your budget, this is a great time to reflect on your financial goals and your progress towards them.
Reassess where you are with your goals and the current trajectory of achieving them and how this new money can aid in bringing these goals to fruition.
What are some common mistakes people make right after a salary increase?
With every salary increase comes the temptation to upgrade your lifestyle. You could get that new car or finally afford that fancy health club membership, but the real lifestyle upgrade is financial freedom which offers no immediate gratification so is often discounted.
Not putting the extra cash to work for your future self if a big, missed opportunity in creating financial freedom. So, ignore the glitz and glam of that celebrity spin class and opt for repaying debt or increasing wealth instead.
How can you prevent lifestyle inflation?
By giving into lifestyle inflation, you are only keeping yourself in a cycle of ‘paycheck to paycheck’ living. Instead, opt to save this extra income before you become accustomed to it. Automating savings and investments is a great way to do this.
Think about your needs verse your wants and what sacrifices are worthwhile for a financially secure future.
Do you really need to upgrade your wardrobe or would you value being able to retire to a lovely beech ten years early whilst your still young enough to enjoy yourself?
What percentage of an increase would you suggest using for spending vs. saving or investing?
If you have specific financial goals, then all of your excess cash should be working towards these but if you really must give yourself some shorter-term joy then at least commit 50% of your raise to your goals.
How about pension contributions?
Increasing pension contributions from pay rise can build wealth without you even noticing the cost as you’ve done it before getting used to the extra cash in your pocket.
Pension contributions come with many tax advantages as well as securing your financial future so building this pot is certainly a good idea however speak to a financial adviser first to assess whether this is the best option for your own personal goals and wealth.
How can investors use the extra income to accelerate long-term wealth-building?
Building long term wealth requires commitment, consistency and time. Directing extra regular income will soon build up into a financial future to be proud of.
Use the allowances available to you such as your pension and ISA allowances. Maximise pension funding matching via your employer. Repay debt. Automate payments so you never need to make the decision to invest, it just happens for you.
Should an emergency fund be topped up?
The decision on whether to top up an emergency fund really comes down to two things, is there a large one-off expenditure on the horizon or have your expenses increased. There is no need to increase an emergency fund simply because you have more budget to do so.
Any cash above short term cash needs and three to six months expenditure is typically put to better use for your financial future by investing the money or repaying debt.
What is one financial move you wish more people would make after receiving a raise or promotion but almost never do?
The best financial gift you’ll ever give yourself is freedom. Keeping your expenditure the same as your income increases is a sure fire way to increase long term wealth. Put the money to use before you become accustomed to it, and you’ll build wealth without ever feeling the pain of paying for it.
How can EQ help?
At EQ, we help our clients create comprehensive financial plans tailored to their circumstances and goals.
We’ll review your current position across pensions, investments, and protection to identify any opportunities and potential gaps in your financial planning.
Book an appointment with one of our financial planners to discuss how we can help you build a secure financial future.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
