Coming out of a deep recession can be an exciting time. Many businesses are looking less shaky, jobs are looking more secure. With employers taking on new staff, some people may be looking at a hike in their income – either in a new role, or from an existing employer who is keen to keep them onboard.
At Continuum we are looking at what you should do if you find yourself in that fortunate position.
The effects of extra income
A rise is a welcome sign that your work has been recognised and as such can be a huge source of personal fulfilment. Receiving a raise or promotion often results in a feeling that life has taken a turn for the better. However, after the initial rush, we can all too easily find that not as much has changed as we had hoped.
But there are some actions you can take to prolong the feeling of wellbeing by making your new extra cash make a difference to your long-term financial situation.
Deal with debts
Debt will eat into your financial wellbeing. Although a mortgage is probably inevitable for most of us, most other kinds of debts, from personal loans to credit cards are actually draining your resources. Credit cards are particularly dangerous, because they are very easy to use, but very difficult to pay off. The interest rates they charge means that your debt will rapidly escalate.
Earmark your rise for paying off debt. Cut up the credit cards if you can, postpone the big shopping trip and if you can find one, transfer your credit card debt to a card offering a 0% introductory period. Plugging a hole in your budget can be the best way to build wealth for the long term.
Paying off debt might not be as much fun as spending your rise on new clothes or a new car, but it will mean that once lenders are given what they are owed, your money will be going into your bank account and not theirs. It means extra cash for you, which in turn means you can enjoy the delight of having a rise all over again.
Set up an emergency fund
A rise might build your confidence, but as Covid has proved all too well, none of us know what is around the corner. It always makes sense to have an emergency fund to call on. A reserve of cash can improve your financial confidence as well as provide practical help if things don’t go as planned. Aim to cover from three to six months of your household expenditure, include mortgage or rent.
Of course, it makes no sense to keep the cash stuffed in your mattress. An instant access savings account, or a Cash ISA might let you get at your money if you need it and – even with the low interest rates currently available – let it start to grow if you don’t. The tax efficient status of a Cash ISA could make it particularly worthwhile.
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Looking at the future
With short term debt and a financial safety net arranged, you should be ready for some forward thinking. A relatively small amount of cash now could make a big difference to your prospects for the future.
Your first priority might be your pension. Under the current arrangements at least, your pension is a very tax-efficient way to build wealth, with the taxman contributing to your pension pot every time that you do. If you’re a basic rate taxpayer he provides an extra 20% on top and 40% if you are a higher rate payer.
In fact, the investment advantages of a pension are so dramatic, the government has set an annual limit (as per tax year 2021/2022) of £40,000 (or as much as you earn, whichever is the lower) on your pension contributions.
But if you are already close to maximising your pension, it is probably already time to look at other ways to build wealth. Most people would benefit from an ISA.
You can put up to £20,000 each tax year into an ISA (as per ISA allowance for tax year 2021/2022). A Cash ISA is simply a savings account which should offer dependable but currently low returns, while a Stocks and Shares ISA makes an ideal first step into the world of investment. What makes them both particularly worthwhile is the fact that they let your money grow tax-free and therefore potentially faster than other types of scheme where the taxman will take a share.
The best plan for your financial future needs to be based on a thorough understanding of your current circumstances and your plans. To arrange an individual consultation, please contact us at Continuum
If you have received a rise – or even if you haven’t – you could be better off with professional financial planning. The simplest way to get it is to call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Your home may be repossessed if you do not keep up repayments on your mortgage.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The Financial Conduct Authority does not regulate taxation advice.