How to maximise a pay rise

How to maximise a pay rise

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. 

Consider cash

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.

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Learn more about savings accounts

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly.