With retailers wooing you with new launches and tempting deals, we are sure you have your shopping lists ready this festive season. And, with the Diwali bonus in the bank account, you must be having a hard time listing out essentials from non-essentials.
With no clear strategy in mind, people often end up buying things which lose usability sooner than expected. Festive bonuses are often treated as an added bonanza and viewed differently from income and savings.
We recommend you avoid such mental accounting and have goals set, irrespective of the source of the money. Here are a few things you can do with your spare money.
Get a term cover of Rs. 1 crore
If you’re a 30-year-old earning Rs 500,000 annually, you may be eligible for a life term cover of Rs 1 crore at an annual premium around Rs 11,000. A term plan is different from an investment-linked endowment plan that may offer you conservative returns along with a life cover that may not be enough to secure the long-term finances of your dependents. A sizeable term plan, however, can do that. If you have dependents, you should certainly have a term cover. Buying it when you’re young makes most sense, for this would ensure lower premiums.
Invest in gold…without buying gold
Gold is the traditional favourite at this time of the year. But did you know you could invest in gold without buying coins, biscuits, jewellery, etc? Physical gold necessitates safe storage and also brings concerns over purity. If you’re looking to buy gold as investment and don’t care about wearing it, you could consider the Sovereign Gold Bond, gold exchange traded funds and gold mutual funds. These three investments can be held in demat form and are linked with gold prices. The SGB and ETFs are sold in units where one unit equals the price of one gram of gold. The SGB is a long-term investment with a maturity period of eight years. ETFs and mutual funds though can be bought and sold in any quantity at any point in time.
Reduce your loans
A little payment towards your loans goes a long way in saving for the long-term. If you are servicing credit card debts, use your Diwali bonus to reduce the debt balance to the highest possible limit. Credit card interest (annualised at anywhere between 20-40 per cent) is very expensive. If not dealt with quickly, it could grow out of proportions and drain your wealth. A Diwali bonus may not be enough to make pre-payments on home loans, on which banks may typically seek a pre-payment equal to the size of one EMI. However, if you can make such a large payment, do consider it strongly. Let’s assume you are servicing a home loan of Rs 30 lakh at an interest rate of 9.5 per cent for 20 years. Assume you’ve paid 24 EMIs, each about Rs. 28,000. If you made a pre-payment of Rs 28,000 along with your 25th EMI, it would reduce your loan tenor by five months, implying savings of nearly Rs 150,000. Pre-paying Rs 100,000 at the same juncture would reduce your loan tenor by 18 EMIs, implying savings of Rs 500,000.
Get a health cover of Rs 5 lakh
Many of us are reluctant to buy health covers since we may find the premium costs prohibitive. However, health covers is an absolute must-have, and under no circumstance should you risk going a day without one. This is because hospitalisation costs can be far more expensive than premium costs will ever be. A 30-year-old can buy a health cover for Rs 5 lakh for premiums around Rs 4500. He can include his spouse and one child in a family floater plan which would cost just Rs 8500. This compares favourably with having to spend lakhs of rupees on hospitalisation out of your own pocket. A Diwali bonus presents the opportunity for you to get this essential protective element for your family.
Invest your bonus
While the urge to splurge during a festive season is high, do strongly consider the possibility of doing the opposite: investing your bonus for the long term. There are tonnes of great options in which to park your money. A bonus may just be the right amount to purchase stocks or lump-sum mutual funds. If you’re looking for conservative, long-term investment options that offer not just tax deductions but also tax-free returns, consider PPF, Kisan Vikas Patra, National Savings Certificates. If you don’t want any of these options, consider locking up the money in a fixed deposit.
The author is CEO, BankBazaar