So you finally did it: You prepared a few notes, sat down with your boss and calmly explained to them why you deserve a pay rise. To your surprise, they agreed, and you left the office with a little more spring in your step, thinking about the extra cash you'll have in your bank account to play with.
If this doesn't sound like you, then what are you waiting for? According to the 19th Annual Salary Increase Survey, released February 19 this year, Australian businesses are planning to increase salaries by 3.6 percent in 2015. This indicates that more employers may be open to negotiating for something a little extra for their star employees.
Of course, if you do get a pay rise, it's important you do the right thing with it. While it can be tempting to start living a lifestyle that matches your new income – and the credit card usage it comes with – it might be a wiser idea to keep living like you never got that pay hike, and use the extra money to invest. Here are a few potential avenues for where you can put it.
Shares and fixed interest
Depending on how large your pay rise is, you may not necessarily have a whole lot more money to play with. According to 2011 Census data, the largest share of households in Australia, or 12.6 percent, have an annual income between $78,000 and $103,999. For the lowest end of the scale, a 5 percent pay rise would mean an extra $3,900 in the bank — substantial, but not exactly an embarrassment of riches.
Fortunately, there are a number of assets that require a relatively low investment entry point. Shares, for instance, may only require a few thousand dollars, but they can net you a significantly higher return. However, if you don't know what you're doing, there can be a big level of risk involved. This is why most people use the services of a stock broker to buy and sell shares and we'd recommend getting advice before taking the plunge.
Aside from this, cautious investors without a large amount of capital can also look at fixed interest investments like government bonds, term deposits or cash. There are a variety of managed investment funds that deal in these types of assets, which can spread risk while also potentially netting you a stable, if lower, profit.
Build up your equity
You might think of your home as a purchase, but it's really an investment. If all goes right, in some decades time, your property could be worth substantially more than what you originally paid for it, which could be the key to unlocking a comfortable retirement.
Rather than waiting until you've fully paid off your mortgage to make use of this equity, with the right home loan you can take advantage of it long before then. So consider using whatever extra income you get to make extra or larger repayments to your home loan. The wider the gulf between what you owe and what your property's value is, the more equity you have to work with and earlier.
No, we're not talking about buying foreign currency. Cash investments are lower-risk, steady investment options where you can earn regular interest on money you put into a bank account. For most people, this means putting it into a regular savings fund. But there are also a number of high interest savings account options that you can use to get a higher than average return: a term deposit, for instance, or bonus interest accounts.
Just be aware that if you're hoping for a larger return, even high interest options may not net you the profit you want, given the prevailing low-interest environment.
Build up your super
At the end of the day, one of our largest savings goals is one thing: funding retirement. In that case, it may be wisest to go straight to the source and invest in your superannuation fund – meaning pay a little extra into your super savings.
The Australian superannuation system offers a number of options for extra super payments:
- You can make a salary sacrificing arrangement with your employer, where your pay rise is funnelled straight into super, and at a low tax rate of 15 percent
- You can also make after-tax contributions that won't be taxed upon being contributed to your fund.
- These after-tax contributions need not only go toward your account – you can also put it into your spouse's account.
With the latter, you can even claim a handy tax offset of 18 percent on contributions up to $3000, as long as your spouse is under a certain income threshold or not working. Remember that by paying more money into your super, you won't only have a larger sum of savings, but this can increase exponentially depending on the fund's investment performance.
But like all investments, there are risks involved. Talk to your financial adviser or account for more information about how these and other invesment options could work for your circumstances.