Whether or not you get a huge salary, a bonus ensures that you remain in festive spirits. It is important to use this seasonal windfall wisely to achieve greater financial security.
Clearing your loans
If you have any high interest short-term loans like personal loans or pending credit card dues, the Diwali bonus is a good opportunity to pay off your debts. With credit cards charging 20-40% interest rate and personal loans coming for a steep 12-24% interest rate, the sooner you pay off such debts, the better is your financial health. If you have long-term loans for home or car, see if your bonus amount fits the pre-payment norms for those loans. Often lenders insist on a pre-payment that is equal to at least one EMI. If your bonus amount is sizeable enough, you could consider making the principal payment that may seem small but has the power to significantly reduce your loan tenure.
Look at your insurance plans
Check if you have sufficient life and health insurance cover. If you are just starting out on your career and are relying only on the employer’s group insurance, the Diwali bonus can be used to buy a term plan or a health plan. As a married individual with a family, there is a case to use the Diwali bonus towards investing in a family floater plan.
Invest in emergency fund
A Diwali bonus can be your best bet to start an emergency fund if you do not have one already. Invest in high liquidity instruments like bank fixed deposits or liquid funds to ensure you are cash ready when faced with any financial emergency.
Boost your retirement fund
The best time to finance your retirement is today. If you are young, you have time on your hands, and you should use it to increase the power of compounded growth. If you are one of those without a retirement plan, use your bonus to start a retirement plan right away. The sooner you start planning and investing for retirement, the bigger a financial corpus you can create for your sunset years.
For example, if you can lock up Rs 1,00,000 today in a mutual fund growing 12% annually over 20 years, you get Rs 9.6 lakh in the end. If the growth rate is 15% annually, you get Rs 16 lakh for the same investment. The same investment in a fixed deposit would earn you post-tax returns of Rs 2.75 lakh.
Check your tax liability
Do not overlook the fact that like your salary, your bonus is also fully taxable. By investing in tax saving options like National Savings Certificate or Public Provident Fund (PPF) you can ensure you save on tax on your bonus as you invest for a long tenure for a better financial future. In fact, PPF is an under-rated investment option, especially for Diwali bonus. Assuming you get a bonus of Ra 25,000, investing it in PPF for 15 years earns you Rs 74,000 assuming the rate of interest stays at 8.10%.
The writer is CEO, BankBazaar.com