How to Readjust Your Investments After You Get a Salary Hike?

Getting a salary hike is always welcome and exciting. It is not only financially rewarding but also a powerful motivator.. It is perfectly normal to be tempted to spend this money on material comforts, but the smart move is to readjust your investments after you get a salary hike.

While spending a small portion is fine, a rule of thumb is to save at least 75% of your raise. So, how can you enjoy your career growth while also strengthening your financial future?

Although this moment calls for celebration, avoid making hasty decisions that lead to increased recurring expenses. Instead, recalculate your cash flows and reallocate your money thoughtfully based on your new income.

Here are a few tips to readjust your investment portfolio post a salary hike:

• Quantify your Salary Hike: At the outset, review the details of your revised compensation. Understand which components of your salary have increased, and compare them with your previous pay structure.  Does this increase the impact of the provident fund contribution? With this increase, have you been pushed into a higher tax bracket?
  
  These 2 questions are important to ask because both have different financial implications. Increased PF contribution means a lower take-home salary. You may not be able to up your lifestyle immediately after all. If your tax liability is set to increase, you must explore investment opportunities to reduce the additional tax burden to the best extent possible.
  
  Once you’ve completed this assessment, determine how much additional money you will realistically have in hand from now on. Saving 75% of your raise is ideal, but aim to set aside at least 50% for investments. If you already have investment plans in place, simply increase the contribution amount.
  
  For example, if your salary has increased by ₹ 10,000 then you must set aside at least ₹5,000, albeit ₹7,500 is ideally recommended. This will help you achieve your financial goals quickly.

Here’s what you need to do to preserve and enjoy your salary hikes and bonuses for a long time:

• Find and List the Investment Gaps: Life comes with a mix of short-term needs and long-term aspirations, and your financial goals can often feel never-ending. Even the most carefully planned portfolios may have gaps that become visible upon closer inspection.
  
  However, the aim of this exercise is not to inflate your financial ambitions, but to ensure that your most important goals, such as retirement, children’s education, or homeownership, are not underfunded.

1. List all the Big and Small Goals: Non-emergency expenses are easily missed when you are focusing on very important goals. However, when you get the chance, you should go through them . Listing all your goals will give you a playing field to start allocating. Examples of such goals can be:

2. Prioritise Goals: The next step is to prioritise how you allocate your increased income. This is not the same as building a comprehensive financial plan, since most of your major goals may already be outlined. What you now need to focus on is how to reassign your salary hike across those priorities.

You should aim to increase your regular investments towards large financial goals in line with your salary growth. If these major goals, such as retirement or your child’s future needs, are already adequately funded, you can then allocate the remaining amount to other big or small aspirational goals.

For example, your salary hike is 10%, and post-tax, it will be approximately 9%. Out of this 9%, first, you need to allocate to retirement and your child’s goals, then to other goals. Also, before anything else, your emergency fund should be priority number one.

• Start Filling the Gaps: Once you have identified the gaps in your investment allocations, it is time to plug those gaps and stop the leakage of your hard-earned money. Factor in upfront investment charges, asset management charges and even taxes. Some pro tips to help you get planning:
  1. Emergency Fund: An emergency fund is supposed to replace your income for 6-12months. If you already have an emergency fund, make sure it keeps up with your income growth. Top it up after each salary hike if need be.
  2. Step-Up SIPs: Most long-term goals are typically funded through Systematic Investment Plans (SIPs), where you invest a fixed monthly amount over a specific period. Consider stepping up these SIPs for any goal where the current allocation falls short.
     
     This method allows your salary raise to be wisely and systematically invested. If your salary hikes are regular and predictable, you can commit to long-term step-up SIPs to help you reach your financial goals within the desired timeframe.
  3. Raise Retirement Contribution: Don’t forget your retirement planning when you receive your annual increments. Annual increments are reminders that you are one more year closer to retirement. Plan by increasing your contribution to NPS and pension plans. By increasing your contribution, you will be able to build the desired corpus faster or build a larger corpus by the time you retire.
• Choosing the Right Investment Options: The majority of your long-term investments are already in place. However, here are a few considerations for you.
  1. Investment Tenure: Staying invested for the long term is a good mantra to follow. But reviewing your portfolio and reallocating when required is essential  to ensure you weed out non-performing assets. The investment tenure for any investment should match the duration of your goal:
     • Long-term goals should use long-term investments for better corpus growth.
     • Short-term investments are more liquid and offer lower growth.
     • You can invest in riskier assets for a longer tenure, i.e., equity mutual funds.
       
       You can invest up to age 100 in the Promise4Growth Plus plan by  Canara HSBC Life Insurance. This ULIP offers the flexibility to choose from multiple fund options, partial withdrawals after five policy years, and unlimited switches between funds. Thus, you can use a single plan to fulfil a variety of goals, ranging from wealth creation to legacy planning.
  2. Cost of Investment: There’s no such thing as a free lunch. Almost every investment carries costs that can affect your returns. Always examine the expense ratios of your options, particularly for long-term investments.
     
     For instance, both mutual funds and ULIPs involve costs. However:
     • Mutual fund expenses are a percentage of your growing fund value
     • ULIP expenses are typically fixed and not tied to fund value
       
       As your investment grows, mutual funds may become more expensive, while ULIPs like Promise4Growth Plus Plan by Canara HSBC Life Insurance can offer greater cost-efficiency over time.
  3. Affordable Loss – Diversification: Over-exposure to any asset class or financial instrument is risky.  So if you cannot afford such a loss, diversify your investments and always focus on the investment tenure. This is because, with time investment, losses can be reversed, but if you  withdraw before the recovery, the money is lost.
     
     For example, instead of investing in 1,000 shares of stock A, split your investment across stock A and stock B (500 shares each). This strategy helps manage volatility and improves your risk-adjusted returns.
  4. Partial Withdrawals (Liquidity): Check whether the investment instrument imposes penalties for premature withdrawals or allows milestone-based flexibility. If it offers liquidity, understand the terms and costs associated with partial withdrawals before committing.

Final Thoughts 

Salary hikes are something that all of us look forward to. While it may be tempting to explore multiple ways to spend the extra income, it is wiser to have a well-rounded plan that offers both immediate gratification and long-term financial security.

Enjoyment is important, no doubt, but saving money for future needs and strengthening your financial foundation are equally important.