The intelligent way to spend your pay hikes

The economic environment in India is looking good working professionals are looking forward to generous pay hikes in 2011. The Annual Salary Increase Survey by Aon Hewitt forecasts a 12.9% salary increase for India Inc. in 2011. While the salary increase in India looks good, one must not forget that inflation is key contributor to the salary increases. What it means that a significant portion of the pay hike is going to go away in managing rising prices. However, some of us will still have a surplus to either spend or save. So what does on one do? Upgrade our lifestyle life, buy a new cellphone, laptop or a car! While these are fun ways to spend the surplus from the pay hikes, there are other intelligent ways to do it.


The most intelligent approach to spend  the surplus from your pay hike is not to upgrade you lifestyle. The inteligent approach to spend the money from your pay hike is to follow the following priorities

1. Pay/ reduce high interest debt
2. Pay/ reduce high value debt
3. Save for the short term
4. Invest for the long term
5. If you still have something left over, then have fun, upgrade your lifestyle if you can

 

How to spend the surplus you have from pay hikes

Following this priority should lead to following actions in the reducing order of priority

1. Do not upgrade your current life style
2. Pay/ reduce high interest debt
1. Pay/ reduce credit card debt, if any 
2. Pay/ reduce personal loans from banks, if any
3. Pay/ reduce auto loans, if any
3. Pay/ reduce high value debt
1. Pay/ reduce education loans, if any 
2. Pay/ reduce home loans, if any 
4. Save for the short term
1. Pay off money borrowed from family, friends etc
2. Build an emergency fund equivalent to at least 6 months of your current income and park it in liquid assets like cash, liquid mutual funds
3. Buy health insurance
   
5. Invest for the long term
1.  Invest to take full benefit of various tax saving instruments
2.  Invest for retirement
3. Buy life insurance
4. Start building a corpus of funds which could enhance your safety net or form the down payment money for a high value purchase like home, higher education, children's marriage, car etc
   
6. Have fun
1. There are infinite ways to have fun.  If you want to maximize the fun you derive from spending money the read the post, Eight rules to get more happiness from the money you spend.

 This approach goes against our normal behavior of first celebrating a pay hike and then doing anything else with the extra money. This approach puts celebrating at the end. Its a matter or individual priorities.