Five ways to use your Diwali bonus wisely

Manish HemrajaniDiwali comes around once a year and so does the bonus associated with it for a large populace in India. This one-time windfall should be used prudently and not frittered away carelessly. Temptations abound as the festive season rolls around. Mouth-watering online-discounts by the likes of Amazon, Flipkart and Snapdeal tempt us to overspend on wants rather than needs. I recommend the following five things one could do with their Diwali bonus in that order.1. Pay off high cost debtCredit card debt is the worst form of debt one can carry with interest rates around 3-4% a month, which translates to a whopping 36-48% per year phew!!! If one has any credit card debt outstanding I would recommend paying off this high cost debt as it can really burn a hole in one’s pocket. Same goes for personal loans. Try and pay off high interest personal loans with your Diwali bonus as this would put you on a much firmer footing financially and mentally. 2. Establish an emergency fund.If you don’t have any credit card or personal loans outstanding pat yourself on the back! You are on the right path to financial freedom. Life is never a smooth ride however, you never know when you would be thrown a curve-ball in baseball terms or a googly in cricket parlance, which derails your best laid plans – loss of job, health issues, an accident these are all events that are not expected or planned for.It is therefore prudent to have at least three months (ideally six months) of essential expenses set aside towards any contingency needs. A Diwali bonus is a good opportunity to stash some cash in an emergency fund. I would not recommend stashing this emergency fund in a savings bank account but rather park it in a liquid fund, which is backed by government bonds hence highly secure and gives you a return of ~8% (as of Oct 2016). 3. Buy adequate term-life and health insuranceThe right amount of health coverage has become a necessity in today’s high cost environment. Healthcare costs have outpaced inflation over the last 10 years and have escalated beyond belief. Between 2004 and 2014, for example, the average medical expenditure per hospitalization for urban patients increased by about 176%. For rural patients, it jumped by a little over 160%. Such spikes in healthcare costs do no favours to India’s massive, uninsured population. Over 85% of Indians in rural areas and 82% of urban residents have no health insurance. It is imperative that one plugs this insurance gap at the earliest as it can bleed away your savings rather quickly. Hence it is imperative to have adequate health insurance coverage and a Diwali bonus is a great opportunity to buy that coverage. Same goes for life insurance. I would recommend a term life insurance plan as a viable option for life insurance. Term life insurance is the cheapest and most appropriate form of life insurance that provides full financial coverage for a defined period of time. In the event of any unforeseen circumstances the death benefit will be paid to the beneficiary. For example a 35 year-old non-smoking male can buy a term life insurance plan for as low as 9,000 per year for 25-year duration. 4. Plan your taxes earlyThe taxman tends to take a large chunk of your bonus payout by way of taxes especially if you are in the higher tax bracket. This is a good time as any to plan for your 80c tax deduction of 1.5 lakhs. The best option, in my opinion, to take advantage of 80c is to invest in ELSS funds, which are fully tax exempt after a lock-in period of only three years vs. a PPF, which has a lock-in of 15 years with interest rates at the mercy of the government every year. ELSS has typically outperformed PPF by a wide margin over a longer term horizon. 5. Allocate money to your long-term goalsIf you have gotten this far and still have money left over you are on the right path to financial freedom. Retirement is something that none of us can avoid and all of us have to deal with it at some point in our lives. Time catches up with everyone. While an SIP is the right vehicle to save for retirement, a lump sum investment towards retirement can act as a one-time boost towards keeping your retirement goal on track. Once you have all of the above covered and you still have money left over you have done a commendable job and deserve to go on a VACATION!The author is Co-Founder of Finaskus