By BhuvanaaShreeram, Co-Founder & Head of Financial Planning, House of Alpha

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Are you moving to a new job and getting a bonus? Congratulations on the new job and the windfall. Now, here is an opportunity to accelerate your journey to financial freedom and wealth.

When is the sign-on bonus received?

A sign-on bonus is paid when the company is hiring a valuable resource who is probably also considering other job offers from competitors. To sweeten the deal, the employers may offer a sign on / joining bonus. Such a bonus may also be given to bridge the gap between the expected salary by a new employee and the existing salary range for the role within the company. It may also be paid to compensate for any benefits the employee leaves behind in their existing employment - like more leave salary allowance, or a possible gratuity payment etc.

A sign-on bonus can be in the range of 10% - 20% CTC offered. For instance, Rs. 5 to 10 Lac joining bonus has become a norm in the industry for someone taking up a job of Rs. 40 / 50 lacs per annum.This is a significant sum of money that can make a difference in your life. 

Before you decide to upgrade your car or book tickets for the fancy holiday to be taken during the break between the two jobs - read this carefully.

Wait out the mandatory period

Don’t do anything with the money yet. Keep it safe for at least 3 - 4 monthsfor the period mandated by the contract before which if you leave you have to return the money.  You can keep it in Fixed Deposits or Liquid Funds during that time.  

A new job environment is an unknown devil and sometimes a toxic work culture might be something you did not bargain for. Before you settle in, an exciting offer from your dream company might come up. If you need to exit earlier than the mandated minimum period, you can quickly exit and save yourself stress or regret.

Buying the benefits

Every organization provides its own different benefits. Check if you have missed out on any critical benefits due to a change of job. This could be health insurance coverage provided by an earlier employer not being available with a new employer or something similar. Use the joining bonus to purchase those benefits privately so that family safety and comforts stay intact.

Pre-pay your loans

You may be paying EMIs for a personal loan or auto loan or servicing a credit card in which the interest rate is high. You can use the joining bonus to pre-pay the loan. Not only will you save on interest costs when you do this, you can also reduce the stress of loan repayments in a new work environment. Getting debt free is one step closer to financial freedom.

Don’t expand standard of living

Splurging the joining bonus on fun purchases is very tempting. But be careful not to increase your standard of living such as moving to a larger home or buying a bigger car with the joining bonus. A larger house and a larger car means additional maintenance expenses. The joining bonus is a one-time affair. It does not guarantee increased income in future years. If you enhance your lifestyle, you can be stuck without enough cash to support these excesses in the next year. 

Top up your child’s education fund

Joining bonus benefits can come in very handy to accelerate achievement of various life goals. One really useful thing you can do is to top up the children's education fund. Irrespective of the age of the children, if you have a target and be done with it earlier allows for compounding of the money till the goal is due. You can also accelerate your retirement fund accumulation. That way this money can help you reach your goal of becoming financially free earlier. 

The bottom line

Joining bonuses can be very useful. It can provide a non-linear impetus to your wealth creation journey. However you have to remember that it is a one-time affair, and does not necessarily repeat itself. Hence the need to be smart with it. Do plan a fun holiday or a new gadget. Just be careful that you don’t miss the opportunity for larger things. With a good plan you have the liberty to indulge in a little open-hearted, guilt-free splurge.  

(Disclaimer: The views/suggestions/advises expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)