Significance of Seventh Pay Commission for your financial planning:
The Seventh Pay Commission, implemented by the government with effect from 1 January 2016, will have multifaceted repercussions on the country’s economic front. On one hand, the Seventh Pay Commission will enhance the annual fiscal expenditure of the government by an amount of Rs. 1.02 lakh crore, making up nearly 0.7% of the GDP. On the other hand, the Seventh Pay Commission will offer opportunities for economic growth of the country. The mandate will provide an increased basic pay of Rs 18000 at the entry-level and Rs. 2.5 lakh as the maximum pay at the cabinet secretary level per month. Moreover, the HRA will be given at the rate of 24%, 16% and 8% of the Basic Pay for Class X, Y and Z cities respectively. Such a hike in disposable income in the hands of nearly 50 lakh central government employees and 58 lakh pensioners will be good enough to stimulate demand for expenditure on high-end consumer durables. Moreover, when one portion of the income is injected back into the economy through investment in the capital market, it will lead to capital formation.
If you happen to be one benefitting from the Seventh Pay Commission, then your pay & allowance package will get heavier by around 23.55% from the month August along with arrears accounted for since 1 January 2016. So, it is likely that you may have now started planning on how to deal with the money. With such hefty arrears handed down at once in your hands, it will be quite natural to be tempted for big-ticket purchases like upgrading your new car, renovating your home, buying a diamond necklace or booking tickets for an exotic vacation. But, while preparing the shopping list, you shall make sure to achieve parity between achieving your short-term & long-term goals.
If you are a financial advisor, then this mandate puts more responsibilities on your shoulder in the form of clientele with a higher investible surplus. As a financial advisor, you will get to manage a bigger corpus of the client & an opportunity to earn more on the professional front. But at the same time, the client will expect you to provide prudent advice on how to deal with this massive influx of funds.
Let me give you some tips to handle your increased income from a financial planning perspective:
1. Refrain from binge spending
With the additional money flowing into your kitty, there will always be a chance to give more importance to things that give you instant gratification thereby ignoring long-term benefits of prudent money management. The likelihood of impulsive spending on electronic items, vacations, home interior décor, car up gradation, etc. would be very high at that time. One shall always try to refrain from all such kind of temptations as these may push other crucial financial goals on the back burner. The additional money shall be, instead, perceived as a means to achieve your long-term goals and be utilised optimally.
2. Pay off debts
Loans usually eat up into the returns that you make on most investments. So, clearing off your outstanding debt liability can be one of the most innovative ideas of using your pay hike. You shall give priority to the personal loans and credit card debt as these signify destructive debt and shall be paid off at the earliest. If you have a home loan liability to shoulder, then you shall apportion one part of the lump sum arrear towards repayment of the principal portion of the loan. Although known to be a constructive debt, clearing off home loans interest payment liability reduces interest burden.
3. Boost Contingency Fund
If you don’t have a contingency fund, then consider apportioning a part of your increased income towards building it. Usually, the emergency fund consists of an amount sufficient to cover your three months’ expenses in case of emergencies like job loss or sudden health failure. For those who already have a contingency fund in place, you may boost your fund by putting the additional pay hike into it to take care of unexpected cash outflow owing to increased healthcare expenditure. Invest the amount set aside for contingency fund into short-term money market instruments for immediate liquidity.
4. Enhance Risk Cover
Risk Management should form a vital part of your financial plan. Owing to the loss of risk cover upon job changes, the employer-provided insurance is considered highly inadequate to cater to your risk cover needs. The basic thumb rule says that you should have a risk cover that is 10-12 times your annual income. So, you may purchase a term plan from the additional arrears in your hand. Purchasing the term plan online is cheaper as compared to buying the same offline & you may fetch a higher risk cover for a nominal premium payment.
5. Step-up Investment
Once you have addressed your debt payment liability & risk cover needs, you can get into the investment mode. After all, only investments are going to you help in bridging the gap towards financial goal accomplishment. If your portfolio is skewed towards either real estate or gold, then illiquidity of your portfolio increases. Instead, try investing in mutual funds, which offer a convenient way to beat the inflation and your money grows at a desirable pace. With the advent of Systematic Investment Plans (SIP), investing in mutual funds has become a cakewalk. Under SIP, a fixed amount is debited monthly from your bank account and invested in the mutual funds. For those who are already in an investment mode, the income hike can be used to step-up your SIP to maintain an ideal saving to income ratio.
From the Auto Sector to the FMCG companies everyone is vying to get a share of your wallet with their own strategies, do keep in mind the Proverb “if you don’t have a plan for yourself, you will be part of someone else’s. Don’t get lured by enticing offers and indulge in impulsive shopping, make sure that your actions are in line with your financial life goals.