Congratulations! The time and effort you have put into building your career with your employer has paid off and you have received a promotion and a pay rise. But what should you do now? Perhaps book a holiday or get a new car. Well, as tempting as these material extravagances might be, you would be better served to pause and consider how this new, hard won pay rise could help to secure your financial future. Here, we will look at the 5 key smart money moves to make when you get a promotion.

Build your emergency fund

Having an emergency fund is the foundation of any successful financial plan and, in the current unpredictable economic climate, it is perhaps even more pertinent. As a rule of thumb, you should have at least 4 months of living expenses available to you in case of sudden unexpected payments, illness or unemployment.

Having this reserve available can avoid desperate financial behaviour in an emergency, such as taking on high-interest debt like credit cards or pay day loans. It can also help you to maintain savings and investment goals through times of volatility as you have a solid buffer for day-to-day expenses.

Your emergency fund should be saved in a liquid money market or high-yield savings account. Given the devaluing nature of cash at the moment, it is a good idea to shop around saving accounts for a little extra return. But keep in mind this money is for “what if” scenarios and therefore needs to be quickly accessible.

Work on clearing any debts

Receiving a pay rise is a good time to evaluate your current debts and plan how to pay them down. Getting a handle on your debts can be liberating and greatly improve your credit score. Typically, the order of priority when paying off your debts starts with the highest interest rates first.

The most common debts include:

• Credit cards
• Loans
• Mortgage
• Finance

Remortgaging

Getting a promotion can be a good time to consider remortgaging to get a better fixed term rate, especially if you are currently paying via an inflation-based variable rate. Many mortgage providers are offering decent rates and longer-term repayment plans, which could set you up more securely for the years to come.

Paying debts or investing?

A common question we receive from clients is “should I repay debts before investing?” While it may appear a common-sense option to pay your debts first, it can often be an inefficient use of funds. Although not guaranteed, investing will generally provide a better percentage return than paying off interest. So, if you can afford to pay back your debts each month, and the interest rate on your debt is not too high, it is generally better to invest any supplementary money.

Check your current and future expenses

Getting a promotion may mean you will incur more expenses over a month. Perhaps you will need to work longer hours, necessitating more child care expenses, or you may need to travel to other locations or commute more often. You may also want to use some of your pay rise on a pass time you really enjoy or a monthly treat, and there’s nothing wrong with that.

But it is important to take some time to evaluate your current budget and what these increased expenses will mean for your outgoings, your long-term saving and investment strategy, and your emergency fund.

Contribute more to your retirement

If you get a pay rise, you should strongly consider using all, or most of, your increase to boost your retirement contributions.

There are a number of positives to contributing more to your work pension:

• In the UK, your employer must contribute a minimum of 3% of your pre-tax earnings to your pension between the qualifying earning ranges of £6,240 and £50,270.
• All of your contributions are pre-tax, meaning anything you contribute reduces the tax and National Insurance you pay on that amount.
• As well as this, you also receive tax relief from the government on your workplace pension contributions.

This makes workplace pension schemes a tax-efficient and lucrative option with the additional employer contribution. Returns on workplace schemes are also generally favourable making this one of the most important investment options towards planning your retirement. For these reasons, the more you can add to your workplace scheme, the better.

Consider your personal protection

While the benefits of promotion are evident, an often-overlooked area is the role of personal protection. When you gain a higher level of income, a sudden permanent interruption can put your family at financial risk.

If you don’t have personal protection in place, such as income protection, life insurance or critical illness cover, now would be the time to look into obtaining coverage. If you already have protection, it is advisable to reassess your current coverage to see if it is still adequate.

Generally speaking, the younger you are, the more favourable the premium. Determining how much insurance you need is based on many factors and needs to be carefully reviewed on a case-by-case basis.

Talk to us

Our team of financial advisers are highly qualified with experience in financial planning. They will work with you to create a financial plan that’s right for you now and in line with your future plans. If you have recently received a promotion or pay rise at work, get in touch to find out how this extra income can best be put to use.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Your mortgage is a loan secured against your property. Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.