Welcome to The Money Coach, a Times of Malta column where readers can ask questions about life's money issues. Send your questions about personal finances, inheritance, gifting or other personal finance topics to moneycoach@timesofmalta.com

Dear Luca, 

I’m 35 years old, working as a manager at a local firm. Recently I got a promotion after years stuck in the same salary.

I used to earn €40,000 per year, now I am going to be earning €48,000.

I know it is a big increase, and I don’t wish to misuse it like what happened to me six years ago, which was the last time I had such a big increase.

At the time my salary increased by €5,000, but despite that, I still managed to save nothing and life continued to be a struggle in terms of personal finances. It’s incredible how money starts flowing into things that before you never considered.

Currently I am halfway towards building my emergency fund, but do have some pending debt, including home loan, and a very small amount on my credit card.

€8,000 yearly is €500 more per month in net terms. How would you use it, considering my situation?

Careful Manager

Luca responds:

Congratulations on your salary increase, and double congratulations for immediately realising that it is better to plan how such an increase will be used rather than letting it come in and deciding what remains to be saved.

Two years ago, I was in a very similar situation to yours when I managed to pay my car loan early. That gave me an extra €200 per month to spend. The mistake I made was allowing four months to pass until I planned the ‘extra’ €200.

And yet, to my great surprise, in just a short time, I had already committed it to several expenses that seemed relevant at the time but were hard to cut back on later. It’s like when you pick a bad habit and it’s difficult to get out of, I simply couldn’t track where the extra €200 were going.

I realised that the biggest mistake I did was not thinking beforehand and planning to which area of my personal finances I was going to dedicate this disposable money.

When I started earning extra money, through my part-time self-employment at the time, I immediately had a plan that it was going to go to:

a. Finishing the build-up of my emergency fund

b. Increase my monthly investments

c. Expanding my business services through self-development and marketing

So there I made a plan, and it worked perfectly – now whenever I have access to extra income, I immediately make a plan for it.

You mentioned several priorities, and these should definitely align with your financial goals. If I were in your shoes, I would look at clearing your credit card debt and building your emergency fund first. Here’s why:

a. Credit card debt often carries high interest rates, making it costly over time.

b. An emergency fund for me is the most crucial fund in every personal finance plan. I never tire of repeating this: liquid funds can help make your life much more stable and save you multiple times in case of emergencies. As a rule of thumb aim for 3-6 months worth of expenses. If you have a family, I daresay I’d recommend a year's worth of expenses.

With regards to paying your home loan faster, that’s a good goal, but it may not need to be your first priority. Home loans tend to come with a low interest rate, so once your credit card debt and emergency fund are covered, you might then consider allocating funds toward it if it's a key financial goal for you.

I also suggest you consider making regular monthly investments as this is a very effective way of compounding your savings into a nice nest egg over the years. This can give you not only a more comfortable retirement but also achieve financial goals that you might have.

It all boils down to what your financial goals are. Define them and be specific - this will help guide you better to use the extra income now and in the future.

Luca is the founder of the Money Coaching Hub. Email him your financial questions or your response to today's question at moneycoach@timesofmalta.com for a chance to be featured in a future column.

Disclaimer: This column is intended to provide general information on various topics related to personal finance. The information provided is for educational purposes only and should not be construed as personalised financial advice for your specific situation. Financial decisions are highly individual and can vary greatly based on your unique circumstances, goals, and risk tolerance. The author of this column is not authorised to provide financial advice. Before making any financial decisions, it is recommended to seek professional financial advice from an authorised financial advisor.