About the time of the year when you will receive your annual performance bonuses and salary hikes.

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I do not expect everyone to be happy with the outcome of the appraisal cycle. However, it cannot be denied you will have some excess cash in the form of bonus at the end of April or May.

How do you plan to use this bonus amount?

Do you plan to purchase the latest iPhone or a new car? Or are you planning a vacation abroad?

There is nothing wrong in enjoying life to the fullest. At the same time, you cannot be oblivious of the ground financial reality. If you are saddled with expensive debt, it is a good idea to settle off that loan rather than buying the latest iPhone. Makes sense?

In this post, I will discuss how you can spend your annual bonus effectively.

Clear outstanding credit card debt

You struggled to settle your credit card dues in full in February and March since you had to make tax-saving investments. Credit card debt is the most expensive debt in the organized finance sector. Add to it heavy penalty for non-payment and service tax. If you are in the same category, this is the time to get your house in order.

Clear off expensive loans

Apart from credit card debt, if you have an expensive personal loan, you can use bonus to square off such loan. Such loans will come with prepayment penalty clause. You need to assess the cost of pre-payment before you decide to prepay.

You can even part prepay your home loan too. This way, you can either bring down your EMI or shorten the loan tenure. Either way, you will pay lesser interest during the term of the loan.

Review your life and health insurance requirements

Getting your insurance portfolio right is more important than getting your investment portfolio right. This is because you may not get second chance to rectify mistakes in your insurance portfolio.

Unfortunately, many of us don’t pay requisite importance to our insurance portfolio. We are more focused on investment portfolio. The irony is that we look for investment angle even when we are buying insurance. Traditional life insurance plans and ULIPs are prime examples.

Review your life and health insurance requirements.

If your existing life and health insurance falls short, this may just be the right time to get our insurance portfolio in order.

Tax benefits are a deal sweetener. Premium paid for life and health insurance plans qualifies for tax deduction under Section 80C and Section 80D respectively.

Build up an emergency fund

If you don’t have an emergency fund, it is a good idea to allocate part bonus towards emergency corpus.

You must have at least 3-6 months of monthly expenses in an emergency fund. The emergency fund can be in form of saving account balance, fixed or recurring deposits or liquid funds. An emergency corpus helps you tide over short-term crisis such as loss of job or a medical emergency.

Make tax-saving investments

Many of us wait till the last quarter of financial year to make tax-saving investments.  And that’s where many of us end up purchasing useless financial products.

You are more likely to make mistakes or purchase a product without understanding it if you act in haste.

This year, try a different approach.

Make or plan all your tax-saving investments in the first quarter itself. Do not wait till the last quarter.

If you are planning to invest in PPF, invest right away. You will earn more interest too.

If you are planning to invest in tax-saving mutual funds, earmark the funds to start a SIP. For instance, if you intend to invest Rs 60,000 in ELSS during the financial year, you can invest Rs 60,000 lump sum or earmark the funds for SIP of Rs 5,000 per month.

Build up a corpus for down payment for house or car

This may not apply to everyone. If you have been planning to purchase a house or a car, you can use a part of the bonus for making down payment for house or car.

Review your portfolio

Beginning of the financial year is the right time to review your portfolio. You can rebalance the portfolio if any of your investments has outperformed or underperformed.

If you are expected to fall short of the amount needed for a goal, you can allocate from your bonus towards that goal.

And Enjoy too

Money is not an end. It is merely a means to an end.

Do plan a small vacation with family. Purchase gifts or gadgets for the family that you promised them a few months back. Don’t feel guilty if you splurge a bit. But yes, exercise some restraint.

The article was first published on PersonalFinancePlan.in. You can read the original article here.

Deepesh Raghaw is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.