When you get a pay raise, it might be tempting to go wild with it.
Before you give in though, consider what to do with a pay raise for an even bigger reward.
1. Begin building a six month rainy day fund
Rather than spend the money, consider building an emergency fund. This emergency fund should consist of six months of your income, and may take a few years of saving to create. You will find however, that it is worth the effort.
An emergency fund ensures you never have to rely on expensive credit cards or personal loans, should you face unexpected events such as a medical emergency.
Having an emergency fund also allows you to act with confidence: you will be less hesitant to quit a bad job, or to pursue an opportunity overseas. You can act in the knowledge that, whatever happens, you will not find yourself short of cash.
2. Invest in yourself
If you also have time, then one of the best things to do with a pay raise is to invest in yourself. Consider skills upgrading courses, such as certifications in basic coding or machine operations.
It is advisable to speak to your boss or Human Resource manager before making a decision. Ask which skills would most assist your Route of Advancement (ROA), and if your employer could further subsidise the cost of your training.
3. Pay off debts sequentially
A life free of debt is a life free of financial worry. If you have debts, your first priority should be to increase the amount of your monthly debt payments. Follow this sequence, in order to eliminate high-interest ones first:
- Credit cards
- Personal loans
- Specific purpose loans (e.g. education loans, car loans)
- Friendly loans (e.g. loans from family or friends, which carry no interest)
Check the loan conditions before attempting to repay loans early. Some banks impose prepayment penalties, which are never worth the cost. If you do face prepayment penalties, save or invest the money instead.
Remember that it is almost impossible to “out invest” debt. It is improbable that any investment can accrue faster than the interest rates on loans, so you should pay off debt before investing.
4. Consider investing in index funds
Index funds consist of a basket of different stocks. When you purchase a unit in an index fund, your investment become diversified across these different stocks.
This allows your money to grow at a steady pace (around 7 – 9 % per annum) through dividend pay-outs, with low risks of being wiped out in a stock market downturn. Index funds also come with low management fees, which means your returns are often higher compared to regular mutual funds.
5. Invest in your professional networks
The best networking events often come with a price tag. However, there are often significant differences from free or communal events – professional networking companies invite industry experts and opinion leaders, which can be invaluable to your career.
Now that you have the funds to do so, make it a point every month to find the best local networking events and make your presence known. The pay-off of meeting even one right person will far outweigh the attendance fees.
Not all that glitters is gold. And your pay raise will be put to better use when you actually think of it as an additional resource to invest, not spend.