September 11 , 2013
Bonus quarter of the year is round the corner and quite some people might have counted, even sold off their chickens before they hatched! In this article, we have listed some good ways of spending your windfall gains. Ultimately, only you can decide what the best way to use your bonus money is.
But wait, before thinking of ways to best use your bonus, figure out how much of it you will actually get to keep after accounting for tax that might be deducted later, at the financial year's close. Check with your employer on net bonus payment.
1. Treat yourself… with restraint
Surprised this tops our list? Especially if the bonus is a reward for your performance, you have all the rights to have a bash, without feeling guilty while doing so. No experience in life might be as enjoyable as celebrating one's accomplishments. After all, treating oneself for achievements could even work as a motivator for continuing to do well!
With these said, if you want to stay remorseless when the spending is reduced to a memory, you need to draw clear lines beforehand. Decide how much would be spent and how much would be put to other use, and stick to it. This is very important. Else after everything you might find you splurged more than you earned!
This is easier said than done, we agree. Some behavioural science experts suggest that one way to deal with this is to treat all money the same, regardless of where it comes from. If you received the same amount over the year as salary instead of as yearly bonus, would you have the same urge to spend it all away?
Money allocated for other purpose can be put to use in one or more of the ways suggested below, whichever you judge is most appropriate for your situation.
2. Pay off expensive debts
By expensive we mean debts like credit card balances, personal loan, and car loan in that order. Interest rates on credit card and personal loan are exorbitant; it is wise to rid them at the earliest possible. Car loan could also be expensive. If interest rate on vehicle loan is more than what you can hope to earn from investment then you would be better off using the bonus money to clear off some of that loan than investing it. Home loans may not fall in this category due to lower interest rate and prospects of enjoying tax benefits on it year after year.
3. Get your insurance and contingency reserves fixed
If you do not have expensive debts to reduce then you can turn focus to being adequately protected against life's eventualities. If you already have life insurance policies, figure out the value of life cover and buy term insurance if it is insufficient. Use this ideal insurance cover calculator.
A mediclaim policy is also necessary; it will keep your pockets intact should you require an unexpected hospitalization. Next, start building an emergency fund with about 3-6 months expenses' kept at arm's reach. This is where you would run to in case a big, surprise expense turns up or your income flow dries up temporarily. This can be maintained in a savings account.
Perhaps there could not be more boring things to do with bonus but these are unavoidable for a secure financial life. Without these, the foundation on which your investments and personal finance life are built on would be shaky.
4. Invest bonus money
You might be interested in investing your bonus money wisely if there are no costly debts and you are adequately protected. Now investment could be in equities, fixed income, gold, property etc depending on how soon you would need the money and what the investment goal is.
In a gist, if this money is required in 2 years or less put them in an FD or a good debt mutual fund. If you can stay invested for at least 5 years you can choose a good equity fund. If you plan to use some money soon and some money in the long term you could divide investments accordingly.
In case your child's marriage is a few years away and gold is on your mind, you can invest in a gold mutual fund or gold ETF and use proceeds to buy physical gold later.
Property requires bulk investment so unless this is available you would have to accumulate funds.
Keep the best for the last. Start with point 2 and think about point 1 after you have pondered over the rest. Why leave chance for regret to creep in later?