The bonus is not just monetary compensation but rather an appreciation of one’s hard work and commitment to the organization. In addition to enhancing an employee’s financial worth, it boosts their morale and sense of self-worth. We are living in an era of rising inflation and rapidly rising needs and desires. Most of us usually survive from one salary to another. In such a scenario, receiving a chunk of money can drive us to make impulsive and often unnecessary expenses.
Using the bonus money wisely can go a long way in ensuring financial stability for oneself and loved ones. The three key considerations – Repay, Invest, and Indulge—in this order can help you make the most of your hard-earned money.
1. Repay: The first and foremost consideration should be to repay any existing loans. Prioritise paying off loans with high interest rates, like personal loans or credit card loans, followed by loans with a high credit value, like home loans. Most loans allow for prepayment up to a certain limit. It is advisable to use a major chunk of your bonus to prepay loans as much as possible. This will help you save on interest pay out in the coming years, which might increase with increasing interest rates over time. Also, reducing debt is psychologically rewarding, as peace of mind is a much-sought-after luxury in our stressful lives.
2. Invest: The next consideration should be to invest towards a financially secure future. As Warren Buffet says, “Do not save what is left after spending, but spend what is left after saving." The annual bonus is a good opportunity to boost investments and benefit from the power of compounding to achieve your financial goals.
a. Short-term investments: First, look out for needs arising within one or two years. For example, funds for school or college admissions soon or some medical treatment that has been advised but is pending due to a lack of funds. Make provision for these needs by investing in instruments like FDs, liquid funds, short-term bonds, etc. that can be easily liquidated when required.
b. Life and Health Insurance: In a world of uncertainties, it is imperative to have life and health insurance. You must invest in life and health insurance policies, if not already done, or enhance the existing coverage through top-ups and riders to ensure optimum financial protection for yourself and your loved ones.
c. Long-term investments: These are investments made towards long-term goals like planning for children’s future, retirement planning, or other life goals like building a corpus to buy a house or maybe start a business. Life insurance plans are excellent financial instruments for long-term investments as they provide the dual benefit of protection and savings. The new-age life insurance plans are expertly crafted solutions that cater to different investment needs, suit individual risk appetites, and can be customised as per personal preferences. Child plans and retirement plans are popular life insurance products as they offer a thought-through and ready-to-use framework that helps you efficiently invest for these important aspects of life. Plus, a variety of other offerings, like money-back plans, endowment plans, ULIPs, etc., help effectively serve other individual goals and requirements. You can get help from life insurance advisors to suggest plans that suit your particular requirements and also provide detailed guidance. Use your annual bonus to make new investments and enhance any existing ones.
d. Emergency Fund: It is important to maintain an emergency fund at all times. If you have withdrawn from the emergency fund during the past year, it would be ideal to use the bonus money to replenish and possibly add to the fund.
3. Indulge: Make sure to use a portion of the bonus to reward yourself. Take a vacation, spend it on grooming, hobbies, learning a new skill, or buying something for yourself or loved ones. Spending on yourself is essential to staying happy, confident, and motivated. However, it is also important to be disciplined in this regard. You must avoid taking high value loans for luxuries. It is much more gratifying to fulfil wishes when you can afford them instead of buying things on credit.
