7th Pay Commission: Assess needs before splurging

The Pay Commission's award will provide a windfall that can be used to both spend and invest wisely.

It is well-documented that people tend to splurge when such windfalls happen as the money is viewed as "found money", vis-a-vis something like "earned money", which is spent more judiciously. Financial planners emphasise that people should pause, review their needs, and then spend or invest the money in a well-planned manner.

As the government will pay out arrears, government employees are likely to get a lump sum amount. "Some part of it may be spent on things you have coveted for long, but the rest should go into your investment kitty," says Hemant Rustagi, chief executive officer, Wise Invest Advisors. It is a good time to start a systematic investment plans, as the market are uncertain and long-term gains can be good.

Assess your near and mid-term financial needs. If the equated monthly instalment on your home loan leaves you with very little money in hand, a part of the lump sum can go into prepaying this loan. If a child's admission is due in a couple of years, invest the money for that.

How you invest the lump sum amount should depend on your risk appetite and investment horizon. If you have less than one year to go, fixed deposits or short-term debt funds are best. If you have three years, opt for balanced funds. And if you have more than five years, invest in equity funds.

For risk-averse investors in the high tax bracket, public provident fund (PPF) is a tax-efficient instrument. "On the equity side, conservative investors should opt for balanced funds or large-cap funds using systematic transfer plans to invest the lump sum gradually," says Anil Rego, CEO, Right Horizons.

Use the salary increase to invest or pre-pay loans. "Take into account the interest rate on your loan, time left for repayment and tax benefits," says Rustagi. If the interest rate on your loan is high, as is the case with credit card and personal loans, repay those loans first.

If you have a home loan, where the rate of interest is 10-11 per cent, the decision should be weighed more carefully. If not much time is left in the loan tenure, it may not be wise to prepay. You would have repaid most of the interest cost by then, and what you are paying now is the principal. It does not make much sense to forgo the tax benefits that you get.

Ankur Kapur, founder of Ankur Kapur Advisory, says: "Use the higher surplus that you now generate to build long-term wealth via systematic investment palns."