A bonus, no doubt, can be spent away. But if used well, it gives you once-a-year option of putting your personal finances back on track
Many of you get your annual bonuses during Diwali time. And most of you (and your families) would have already made plans about how to ‘use’ this once-in-a-year windfall. And by ‘use,’ we simply mean ‘spend,’ isn't it?
If you are in no mood to listen about how you can be wise about this bonus, then you should not read any further. But if you can spare a few minutes and want to have some unsolicited advice, then read on.
Fix your liabilities
- Your employer would have deducted the 10 per cent tax and handed out the bonus. But if you belong to a higher tax bracket, then there is more tax to pay on this bonus. So set that aside first.
- Many of you, in anticipation of the bonus, would have already spent some money. Using credit cards to purchase during those once-a-year Diwali discount sales. Those credit card dues have to be paid back in the coming weeks. And you know how costly unpaid credit card balances can be. So go ahead and clear your card dues.
With these two taken care off, now can you go and spend the remaining bonus freely?
Maybe you can.
Consider the following points first:
- Credit cards charge 30 per cent or higher. And if you have personal loans, then even those charge around 13-14 per cent. That’s not cheap either. And there are no tax benefits on these loans. So ideally, first try to pay off these high-interest personal loans. Even if you can’t pay in full, try paying a part of it so that it reduces the interest outgo to some extent. This is also applicable to your car loans.
- When it comes to life insurance or health insurance, most of you are under-insured. Or you depend solely on your employer’s insurance coverage. If you belong to either category, then use your bonus to make amends for this mistake. Get yourself a good term life plan and get your health insurance in order.
- You know that having an emergency fund in place is the right thing to do. But do you have it? At least three months worth of expenses should be parked in an emergency fund. If you don’t have it in place, then it is highly recommended that you allocate at least some part of your Diwali bonus to it. Or, if you have three months’ worth amount already, try to bump it up to six months’ worth.
- Prepaying Home Loans! That will get the attention of many. And it’s fairly common. Many people do use a part of their Diwali bonus for home loan pre-payment. Let’s take a small example of why people do it. Suppose you took a home loan of Rs 40 lakh at 8.75 per cent for 20 years in Jan-2019. The monthly EMI is Rs 35,348. Now if you continue paying regular EMIs (assuming constant loan rate), the loan will be repaid by Dec-2038, i.e. in 20 years. Total loan repaid is Rs 40 lakh and total interest paid is Rs 44.8 lakh. Now let’s say you use Rs 75,000 from bonus to make a prepayment every Diwali (around November). What will happen then? Your loan will get repaid by Dec-2032 itself. And you only pay Rs 29.8 lakh in interest. So you saved almost Rs 15 lakh in interest payment.
- With higher interest loans (credit cards, personal loans), insurances and home loans discussed, is there anything else left?
- Investment towards your financial goals. Without trying to convince here, as you already know its importance, let me just say that if you still have any bonus left after doing all of the above, you can think about using this bonus to fix the gaps in your investment plan for children’s education, retirement savings, etc.
The idea of this article is to help you think through your decisions.
A bonus, no doubt, can be spent away. But if used well, it gives you once-a-year option of putting your personal finances back on track. So take your call.(The writer is the founder of StableInvestor.com)