If you have recently moved jobs or received a promotion or pay increase, you may be thinking: what do I do with this extra capital? From our standpoint, we believe that this is the ideal time to start addressing your financial needs. You may have just received an extra 10% or 15% of pay; happy days! Think of this as a gift. As we have explained in other blogs, it is crucial to ‘pay yourself’ first because you worked hard to earn this extra money. There needs to be something in this for you; reap the rewards of your efforts. It could be a couple of hundred euros every month that gets fenced off for something for yourself. Then we get down to the nitty-gritty.
After you reward yourself, we might start looking at your rainy-day savings. Try to set a goal for how much protection you want to build. For example, if you have saved the equivalent of three months’ take-home pay, why not increase it to six? Start with one thing at a time; let’s get this sorted first. So, we have now ticked off two of our primary needs: one thing for yourself and your rainy-day cash pot. Next, we can deal with the rest of the capital.
Remember, every financial decision is the function of resources allocated towards it. If you have just received the gift of more resources, well, you best not waste it.
Even if you have decades until retirement, the best time to start saving was yesterday. So next, let us look at your pension fund. At Rockwell, we often tell our clients the best time to assess their pension is at a pay review with their employer. You do not need to be getting a massive pay increase or promotion, i.e. it could be a 5% pay increase. If you have not yet committed to making extra contributions, you can speak with your employer about taking 1% now and putting 4% into your pension. In this case, you are not moving a penny out of your disposable income, but you have still locked 4% into your pension contribution from now until you retire. It could even amount to 20 years of extra contributions, which in theory, has not ‘cost’ you anything. It is a great way to build up your pension contributions. Keep in mind that what you manage to save for retirement is the biggest determining factor for how comfortable you will be when it is time to leave the working world.
Other Areas to Consider with Any Leftover Unallocated Money
Start by paying off that debt. Minimizing repayments (decreasing interest amount, for instance) can free up income to fund something else. Not only will paying off the debt early help decrease rising costs, but it can also help reduce money-related anxiety.
Working toward establishing good credit habits can also help improve your finances. An easy first step is to keep up to date with your bills and make sure to pay them on time every month. If you have a little bit extra in the pot, consider paying off some of your bills ahead of their due date before they get a chance to accumulate.
With financial planning, of course, there are several rules. However, in reality, when we sit down to plan, we often think, well, what should we actually do? In most cases, it is to find the easiest way for things to work. After a pay increase, it is easiest to address your medium to long-term needs because of the extra capital you have on your hands.
If you need advice on where to apportion your additional income, or if you just need general personal finance advice, arrange a consultation with one of our Rockwell financial experts at hello@rockwellfinancial.ie or +353 1 296 6120.
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