Your financial circumstances will change over time and, if you’re fortunate enough and you work hard, this may well include annual increases.
But what does this mean for your monthly or annual budget? We have a look at what you should change when you receive a raise.
Tip: You can try our budget calculator and find out how to get your money in order.
Changing your budget
According to Geo Botha, marketing director and wealth manager at Bovest, you should always work with the 50/20/30 principle when it comes to budgeting.
This means that you should divide your income based on the following:
- 50% of your nett income should go towards your “must have’s” (rent, electricity, etc.)
- 20% should be invested or saved (RA, emergency fund, etc.)
- 30% can then go towards your “nice to have’s” (entertainment, etc.)
“By adhering to these percentages, you will automatically invest more, while also allowing more money to spend,” says Botha.
He believes that the biggest mistake people make when they receive a raise is to increase their spending and not their investments. This, he says, should always increase proportionately.
What else should you keep in mind?
Ruvan Grobler, wealth manager at Bovest, agrees that the key is to not alter your “nice to have’s” budget too much, and to avoid spending the new, extra income.
“Look at your debt first and see which account has the highest interest rate. If it’s your credit card, pay more into that to relieve a bit of pressure and pay it off quicker,” says Grobler.
“After this, you should look at your investments and check whether your emergency funds are enough (3 to 6 months’ salary). Next, make sure you are making use of the full 27.5% of your annual salary contributions towards your RA, as this is a good way to get a bit back from SARS,” says Grobler.
He explains that the final step would be to alter your discretionary investment contributions.
“The key take-away is to increase your net worth as you earn more. You should not spend more to keep up with the Joneses. Rather, follow a strict financial plan set up by a professional and increase your wealth,” says Grobler.
Use your new income to help with your debt. You can consolidate your debt today.