Using bonus prudently

It’s that time of the year again when festivals to many would mean more than just family time and celebrations. You may find yourself sitting on a Diwali bonus or simply a year end bonus from the organisation you work in. A neat lump sum of money can come in handy, but chances are that you will exhaust it in impulse spending. While the festive season gives you a reason to splurge, it is also an opportunity to strengthen your financial position. Here are a few tips which will help you use your bonus money more effectively.

• Build an emergency fund: This is the basic of financial planning, yet many of us either do not have an emergency fund in place or it is not adequate. Without an emergency fund, in the case of a financial emergency, we end up using our credit cards or dipping into our savings. A lump sum bonus can help you create a contingency fund you can dip into in case of emergencies or unforeseen events. Do not leave the money lying in a savings account instead park it in a liquid fund. Liquid funds have no exit load and will mostly give you a higher rate of return than what you would get in a saving bank account. The money can be redeemed in less than 24 hours.

• Pay off debt: For some of your debts like personal loans and credit card debt, you end up paying interest at a higher rate than what you would earn through investments. A lump sum is a good opportunity to pay off as much debt as possible. If you have a home loan, you can use the lump sum to pre-pay it, taking into account prepayment penalty, if any. This can reduce the amount of interest you would be paying. It is recommended that you keep the EMI levels same and reduce the tenure of your loan.

• Perk up your insurance cover: Insurance needs to be reviewed periodically and may need changes due to a lot of factors. A bonus amount may be a good time to boost your life and health insurance cover if your insurance coverage is not adequate. With rising medical costs, it is always a good idea to top up your health insurance plan for an enhanced coverage. 

• Use it as down payment for big ticket loan: While you can avail a loan for home or car purchase, you also would need to pay a down payment amount. If you are planning to take a car or a home loan in the near future, you can use the bonus money to pay a higher down payment for the loan and thus effectively reduce the EMI outgo.

• Start investing in equity MF SIPs: You would be investing for various long term goals whether it is for your kid’s education and marriage or your retirement. A lump sum bonus amount can be used wisely to give your investments a boost.  While you could invest the lump sum into equity mutual funds and earmark it for your long term goals, it is suggested that you park your money in a liquid fund and do a monthly transfer from there, which is known as a Systematic Transfer Plan (STP). This will help to invest your lump sum as SIPs over a period of time.

A good way of using your bonus money would be striking a balance between things providing for your wants and things which would build your overall financial health. Use the extra income smartly to maximise the value of your bonus.

anagh@outlookindia.com