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Jaya:
Welcome back to Kairos, a podcast on financial planning where we talk about doing the right thing at the right time. We have Susithra joining us in today’s conversation. Hi Susithra!
In our September podcast we discussed the trend of more and more people aspiring to move away from their 9 to 5 job. The topic that we have for today is in similar lines. Today we will discuss how job market has a direct impact on your financial growth. During the pandemic we saw that many companies laid off their employees while others moved to the new norm of working from home. But now the job market seems to have made an u-turn, with more and more companies opening up offices and hiring new talent. This offers a great opportunity for those who are looking for career growth as well as financial growth.
Susithra:
You are totally on point Jaya. Usually, people think of job switch as a step towards career growth but do not associate it with financial growth. In today’s episode we will shed some light on how people who are switching jobs can resize and repurpose their existing financials and take advantage of it to reach their financial goals.
Jaya:
Interesting view. So, how do you see this trend impacting individuals’ financial growth?
Susithra:
Job switch usually comes with a hike in salary, right? Expenses might not increase in line with this increase in income immediately. This can be redirected towards achieving someone’s financial goals by investing in financial assets towards long term growth.
Jaya:
Right. Someone who is switching jobs might not directly co-relate the increase in income towards increase in investment capacity. So, what are all the financial aspects one needs to consider while switching jobs?
Susithra:
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- Contingency reserve – appliance reserve
- Term cover – based on HLV, will increase with increase in income. Reassess and take additional cover if required. Though the health insurance doesn’t immediately gets impacted by salary hike, it is possible that you could’ve taken a basic cover when your cashflows were smaller. So increasing the health cover also makes sense when there is an increase in cashflow and you can afford the additional premium. Other way to look at this is with your lifestyle improving, you might choose to go to a hospital which will provide comprehensive care, hence charging a higher fee. In all these instances it makes sense to increase your health cover
- Goal based planning – Identify goals and increase your investments towards achieving them
- Debt management – See how you can efficiently manage your debt. One way to do it is by Dynamic Debt Management – If the spread between your interest rate and return on investment rate is not favourable-use a portion of additional cashflow to bring down the principal balance. If not, then invest the excess cashflow instead of prepaying debt
- Taxes – with increase in income your taxes naturally go up. Plan for your taxes well in advance and start any fresh investments towards tax savings if needed. Though you can always get a refund of any taxes paid in excess, investing is a better way of handling your money, as you will earn an interest on your capital invested for the period. A tax refund does not include any interest component. Talk to your new HR and understand your salary components. This will help you plan your taxes efficiently
- Financial planning – explain how it covers all above aspects and helps in redirecting excess funds towards achieving goals.
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Jaya:
Right understanding pay slip is crucial not only from taxation perspective but also it will give you a clear picture of what other additional benefits your employer is offering. For example – health insurance, life insurance, etc. This brings me to the next question that most people have in their minds while switching jobs. What happens to the retirement benefits such as PF, gratuity, etc. when someone? Will it also be transferred to the new employer, or should the individual withdraw the funds?
Susithra:
Very good question. All employers offer some form of retirement benefits to their employees. And when a employee is moving to a new employers usually they have 2 options.
In case of PF, you can withdraw the fund or you could just link your PF account to your new employer, so there is no discontinuity. Every PF account has an unique id called Universal Account Number (UAN). This helps you identify the current balance of your PF account and contributions made till date. Simplest way to plan for retirement is to move your PF account to your new employer just by providing them the UAN number. At present PF account offers an interest rate of 8.5% and there are added tax benefits such as contributions upto a limit of 1.5 lakhs can be claimed as deduction under 80C. So, do not withdraw the funds from your EPF account unless in cases of emergencies.
Gratuity is another component offered by employers as retirement benefit. Usually you have to stay with a company for atleast 5 years to be eligible for gratuity. This amount is credited to employee as full and final settlement on the day he leaves his current employer. Now, the government is discussing ways to allow transfer of gratuity similar to PF transfer between two employers. If this change comes into effect, then employees can benefit from gratuity transfer.
Jaya:
Right. One can take advantage of compounding when you let your money invested in any of these assets. So to sum up financial planning is the key to achieving your goals, especially when you are switching jobs. You must repurpose this increase in cashflow, start investing and reach your financial goals.
That’s it from our end.
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