It is that time of the year when people are all geared up to receive their annual bonus for all the hard work they have put in throughout the year.
People generally use lumpsum bonus amount for various purposes such as annual vacation, buying a car, gadgets, furniture etc. Others utilize the high cash flow for tax planning, repayment of loans, investments etc. Thus, it purely depends on an individual where and how they spend their bonus component which is actually decided by their need and requirement.
While the bonus time is around the corner, here are 6 items you should spend your bonus on.
1. Invest Bonus towards an Emergency Fund
It is very important to keep some funds aside for any unforeseen circumstances that may arise at any point. Future is unpredictable and so is an emergency. Thus, to deal with such emergency situations, one should keep aside some funds for an emergency situation. You should always plan your expense for the next 3 months period and accordingly transfer the money to a separate account (which offers good returns such as any liquid fund) in order to keep it handy and safe. These funds should be parked in mutual funds or any other instruments from where withdrawal is very easy and quick. For example, Liquid funds are such funds where investment is comparatively safe and gives you better return as compared to the savings account. Not sure how much to invest for emergency fund, try out the
2. Clear any Credit Card Dues or Prepay Personal Loans
If you are overburdened with loans to repay, it is a good idea to clear the loan that has the highest interest rate and does not provide any tax benefit first. For example, clearing credit card dues is a better option rather than clearing home loan dues. Similarly, a personal loan should be cleared first than home or car loan as personal loan generally has a higher interest rate. Even unsecured loans, taken from friends and/or relatives, should be prepaid. It helps in retaining the trust and helps in maintaining the relationship properly.
A word of caution – Do not rush to prepay your Home Loan! Rather invest that amount for the Long Term.
Use: Loan EMI Calculator
3. Invest Bonus for the Long Term
Bonus money may be used for investing in long-term instruments such as equity mutual funds. If investing a large Bonus amount to mutual funds, you may use a Systematic Transfer Plan (STP) strategy. STP helps you average your investment cost and also you mitigate your risk to a considerable extent.
4. Retirement Planning
Since we are not designed to work always, retirement is one thing that needs to be planned meticulously. After retirement, when your monthly income is dependent primarily on what you save today, it is important that you plan it well from now so that you don’t face any cash inflow issue at a time when age is not in your favor. For retirement planning, investment in schemes such as Employee Provident Fund, Public Provident Fund, National Pension Scheme etc. should be explored and started (if not done already) with bonus money. When it comes to making investment decisions, people generally tend to postpone each day with a mindset that it hardly makes any difference if the investment is delayed by 24 hours. But this decision of postponing has a real cost attached to it and doesn’t come free as it may seem. Check out how your delay can cost you.
Also, investors lose on the compounding effect that actually has a potential to multiply your money. Compounding occurs when the return on initial investment is invested back which further earns returns. Let us explain compounding with a small example: Assume Abhishek invested Rs 25,000 in an instrument that yields 10% returns. Thus, return generated for the first year is Rs 2,500. Abhishek reinvested his income next year making his investments Rs 27,500 (25000+2500). This renewed investment further earns 10% that is Rs 2750. This is the power of reinvesting i.e., compounding. As time passes by, this 10% return becomes promising. So start early and maximize the benefits.
5. Plan for the big purchase
Everyone dreams of buying a home, car, etc. One should keep aside money for these important goals with a discipline of not using the money of one goal for another. For example, never dip into children’s education goal for a vacation.
Last but not the least, and apparently, one of the most important one:
6. Reward yourself
Never lose out on this opportunity. Do keep aside a pool of money to treat yourself, after all, it’s your hard work which has helped you earn the bonus.