How To Increase Financial Security After A Pay Hike

By BankBazaar | December 6, 2016

How To Increase Financial Security With A Pay Raise

Many of us often wonder about how best we can utilise our excess money when we get a pay raise at work. After all, financial security is of utmost importance in this day and age. Here are eight Investment ideas that can help you boost your financial security after you receive a fatter pay cheque.

Contributory Provident Fund

Choose to increase your contribution to your Provident Fund. All you need to do is request the accounts department at your office to take out a larger sum from your pay cheque. This is an ideal way to plan for retirement and build a tax-free retirement fund.

Let’s illustrate your investment earnings for you.

Monthly contribution: Rs. 5,000
Interest rate: 8.75%
Maturity value after 20 years: Rs. 32.25 lakh

That’s certainly a tidy sum to add to your savings, isn’t it?

Additional Reading: Get Extra Benefits From The Employee Provident Fund

Recurring Deposits

Are you looking for a way to salt away money for short-term goals? A Recurring Deposit is a good idea. This will help you build a habit to save. But, what’s good about a Recurring Deposit? Well, the interest rate on an RD remains the same until maturity of the deposit.

Banks offer Recurring Deposits for a tenure of upto 10 years. However, you should opt for a tenure that matches your goals.

Let’s illustrate your investment earnings for you.

Monthly contribution: Rs. 10,000
Interest rate: 7.5%
Maturity value after 3 years: Rs. 4.15 lakh

Additional Reading: Savings vs Investments

National Pension System

The National Pension System is another investment option you could consider if you’re looking to create a retirement corpus you can depend on once you decide to call it a day. You can also enjoy additional tax benefits by investing additional funds in the National Pension System. This excess money can help you save taxes. For example, if you invest Rs. 50,000 in the NPS, you can avail an additional tax deduction under Section 80CCD(1b). This will be in addition to the tax deduction you can claim under Section 80C of the Income Tax Act.

With the NPS as your investment product, you can invest in a mix of corporate bonds, equity funds and government funds.

Let’s illustrate your investment earnings for you.

Monthly contribution: Rs. 4,000
Returns assumed: 9%
Maturity value after 20 years: Rs. 32.2 lakh

Additional Reading: Why Investing In NPS Is A Good Idea

Life Insurance

A low cost Life Insurance policy will protect the financial future of your loved ones and dependents. Consider a Term Life Insurance plan to ensure that your family is financially protected in case of your demise.

The insurance cover you choose should ideally be at least 6-7 times your annual income. A Term Insurance plan will give you a high Sum Assured at an affordable price.

Additional Reading: Live (Relatively) Long And Prosper

Equity Funds

Dive into Equity Fund investments with Equity Linked Savings Schemes. Every investment portfolio must have some degree of exposure to equities. These investment products can help you beat inflation. Try investing in ELSS funds through a Systematic Investment Plan.

But wait! There’s more. ELSS funds are eligible for tax savings under Section 80C of the Income Tax Act. Want more? Long-term capital gains from equity funds are also exempt from tax.

Let’s illustrate your investment earnings for you.

Monthly contribution: Rs. 5,000
Returns assumed: 12%
Maturity value after 10 years: Rs. 11.20 lakh

Additional Reading: Risks & Returns In Tax Saving Instruments

Low-risk

In case you are not very comfortable investing in stocks, you could choose to invest in low-risk Monthly Income Plans or Debt Funds.

Monthly Income Plans only invest 15-20% of the corpus in stocks. The remaining corpus is invested in bonds and deposits.

Debt Funds are also rather safe investments because they are not invested in stocks. Among Debt Funds, Recurring Deposits and Fixed Deposits, Debt Funds are a more feasible investment option. This is because the income from this investment is taxed only at withdrawal and at a low rate.

However, be prepared to get lower returns on your investments in Debt Funds when compared to equity investments.

Let’s illustrate your investment earnings for you.

Monthly contribution: Rs. 10,000
Returns assumed: 9%
Maturity value after 5 years: Rs. 7.5 lakh

Additional Reading: Introduction To Debt Funds

Atal Pension Yojana

The Atal Pension Yojana investment scheme is another good option for investors seeking ways to build a retirement fund. This scheme is available to people aged below 40 years. An investor is required to make contributions until the age of 60 years. Pension payments will commence after the investor attains the age of 60 years and the pension will be payable throughout the lifetime of the investor.

What is the investment required for a monthly pension of Rs. 5,000?

Age 25 years 30 years 35 years
Investment tenure 35 years 30 years 25 years
Monthly contribution Rs. 376 Rs. 577 Rs. 902

Additional Reading: Small Schemes For Low Income Groups

Sukhanya Samriddhi Yojana

The Sukhanya Samriddhi Yojana is aimed at encouraging people to begin saving for the girl child. Investments in the Sukhanya Samriddhi Yojana also offers investors tax benefits.

The scheme is available to parents who have girl children below the age of 10 years. The Sukhanya Samriddhi Yojana scheme has a yearly investment limit of R. 1,50,000. Contributions to this savings scheme is eligible for tax deductions under Section 80C of the Income Tax Act and the investment corpus accumulated is tax-free.

Although returns are assured, the interest rate can decrease in future as this scheme is linked to the yields of government bonds. However, returns from the Sukhanya Samriddhi Yojana scheme will be higher than returns offered by the Public Provident Fund.

Let’s illustrate your investment earnings for you.

Monthly contribution: Rs. 12,500
Interest rate: 8.6%
Maturity value after 14 years: Rs. 40 lakh

Start putting your money to work by making the right investment choices.

Additional Reading: All About Life Stages & Investments

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