Expecting a hefty annual performance bonus? It is the time of the year many of us start getting excited about the salary hikes and annual bonuses. Not everything is in your hands but the anticipation and excitement is palpable. There is much time spent in cabin gossip over a cup of coffee speculating over the quantum of annual bonus. 40%, 50%, 100% or 150%? Well, you will soon find out.
However, have you given thought to how you are going to use the bonus amount? At least, some of us already have. You may have already planned to purchase an expensive gadget or go for a long vacation. There is nothing wrong with this approach. However, I would suggest that you also give some consideration to your financial health. It may not be wise to purchase an expensive gadget when you cannot pay your credit card bill in full. A number of us somehow manage to inch up our monthly expenses to the monthly income. This leaves you with little financial discretion to get your financial health in order. Annual bonus gives you that opportunity. Hence, it is prudent to restrain yourself to an extent and use annual bonus to improve long term financial health. In this post, I will discuss some of the effective ways to utilize the bonus amount.
#1 Repay Expensive Debt. This has to be the topmost priority. If you are surviving by making partial payments on your credit card, then you must use the bonus amount to make the payment in full. Credit card debt is the most expensive debt in the formal finance sector. Square it off. If you had to take a personal loan in an emergency situation and are paying a high rate of interest on it, then you must also consider paying off such loan. Do consider the pre-payment penalty before making the decision.
#2 Part Pre-Pay Home Loan. Home loans come with tax incentives, which bring down the effective cost of loan. However, since the tax benefits for home loans are capped, it is quite possible that you are not getting tax benefit for the entire loan payment. Hence, the post-tax cost of loan may not be as low as you think. You can find out for yourself the extent of benefits you are actually availing and make a decision subsequently. If you have a high value loan, it may make sense to part-prepay the loan to make the loan amount manageable. Go through this post for more on this.
#3 Plan Taxes. You don’t have to wait till the January, February or March of next year to start thinking about tax-saving investments. You can make these investments in April, May or June this year too. And it is a better approach too. You are running after so many things in the last quarter of the financial year. You may find it difficult to spare time to understand financial products before you purchase them. This makes you ripe for slaughter by unscrupulous insurance companies. The insurance company employees have their sales targets to meet. And you have your tax-saving targets to meet. What synergy!!! And this synergy is perhaps one of the greatest ways of wealth destruction for investors like us. You will end up purchasing insurance-investment plans which are opaque, provide little life coverage and guaranteed poor returns. Traditional life insurance plans are a case in point. High time you change your approach to investments. Start and plan early. Don’t leave it till very late.
- If you are planning to invest in PPF, you can invest from your bonus amount. The earlier you invest, the more interest you earn.
- If you are planning to purchase term life cover, purchase it at the earliest.
- If you are planning to invest in tax-saving mutual funds, earmark a portion of your bonus to start SIP of say, Rs 5,000 per month.
#4 Review Your Investment and Insurance Portfolio. The hectic last quarter of the financial year has just passed. The workload in office may have reduced considerably. Find some time to review your finances. Assess how your investments are doing and if you are on track to achieve your goals. If you think you might fall short, you can use your bonus proceeds to bridge the gap. You can also take this as an opportunity to rebalance your portfolio.
You must also assess your insurance portfolio. Purchase additional life and health cover, if needed. The premium for life and health insurance qualifies for tax benefits under Section 80C and 80D of the Income Tax Act. So, you get to save some tax too.
#5 Build up Emergency Corpus. You need some amount stashed away only to be used in case of an emergency such as loss of job or a hospitalization. Though it is difficult to put a number to how large the corpus should be, you can target at least 3-6 months of expenses including any loan EMIs in a fixed or a recurring deposit or a liquid fund. If you have not created such corpus, now is the time. Use annual bonus to get started.
#6 Beef up Your Down-Payment Corpus. If you have been planning to purchase a house or a car, then use the bonus amount to add to the corpus. You may not be able to save aggressively for down-payment from your monthly salary. However, with this excess cash in hand, you can consider adding to the down-payment.
#7 All Work and No Play Makes Jack a Dull Boy. Do not just plan, plan and plan. Reward yourself for the great work you did during the last year and your family for the support they extended. Plan a vacation with the family. Get yourself the gadget you have been planning to buy and the gifts you promised your family. Just don’t go overboard. Strike a balance.