Total household debt stood at $1.84 trillion at the end of 2013 – that’s a personal debt of $79,000 per living Australian, according to the Australian Bureau of Statistics. So with current household debt higher than it’s been at any period in the previous 25 years, what should you do with your next pay rise?
It may be tempting to simply start spending more on everything – from going out to splurging on your credit card but financial adviser Greg Pride of Centric Wealth said a pay rise is a great opportunity to consider your financial goals.
“It’s a good time to reflect on your spending and saving habits because at that point you’ve been coping in some sort of way. You can think about the best way to spend this ‘windfall’.”
Pay off credit card debt
Pride said the priority with any additional income should be to pay off non-deductible debt, and in particular credit cards. With interest rates north of 17 percent, a sizeable credit card debt could be costing hundreds or thousands of dollars in interest repayments. That is simply wasted money that you could be putting towards savings.
Make an additional mortgage repayment
Any additional repayments you make on your mortgage will go towards reducing the principal of the loan and can dramatically reduce your repayments over time and the amount of interest you pay. This is Pride’s second preference for funneling some of the extra cash from your pay rise.
Build an emergency fund
Living pay cheque to pay cheque is stressful and can leave you vulnerable to financial disasters. Therefore, Pride recommends always having a cash reserve or emergency fund from which to draw in unexpected emergencies, such as an accident, job loss, urgent repairs needed on the house or a medical emergency.
If you don’t already have one, a pay rise is a good opportunity for building an emergency fund. High-interest savings accounts are a great option as they reward regular deposits and charge lower fees.
Boost your super
When it comes to putting part of your pay rise towards superannuation, Pride argued it would depend on your age.
“The answer for a 20-year-old will be different than for a 60-year-old,” he said.
“Yes, super is a savings vehicle but it’s more relevant for someone closer to retirement.”
While Pride does not advise spending your pay rise thoughtlessly, he does think it’s healthy for personal morale to reward yourself with a special treat, such as a trip, particularly after paying down your debts.
“It’s important to have a sense of reward,” he said.