5 Ways to Use Your Bonus Judiciously

The end of the financial year brings with it the renewed hopes of increments that can improve your lifestyle and allow you to save more while at the same time beat inflation. Along with your annual increment, you may get that long awaited bonus which you may want to spend on some much-desired luxury purchase or invest for your financial security. The choice that you make between the two options i.e. spending or investing your bonus can make a significant difference to your financial wellbeing in the long term.

So, what constitutes a good plan to spend your yearly bonus? Here are some ways you can put your bonus to good use for your family’s financial security and well-being.

1. Pay off debts: The most important area you should consider while spending your bonus amount is to reduce your debt obligations. Your endeavour should be to pay off the loans that have higher rates of interest e.g. unsecured loans like credit card loans, personal loans etc. You can consider prepayment of other loans, but you should do a cost benefit analysis and make informed decisions. For example, you should also consider benefits that are applicable on certain types of loans e.g. home loans, education loans etc and pre-payment charges (if applicable) if you plan to pre-pay your loan partially or fully.


2. Invest for your long-term goals: It is a good strategy to periodically evaluate your financial goals and make changes if required. For example, you may have to set a goal for your child’s education but later realized that your child wants to pursue a career that will require more funds. In such cases, you would need to increase the amount of your investment to reach the revised goals. You can use your bonus towards goals that need more investments.
   
   You should also monitor the progress in achieving your target corpus against your goals and use windfall gains to make up for shortfalls (if any).If you find shortfalls in your target due to inflation or not being able to invest as much as you had planned, you may use a portion of your bonus to replenish your corpus for long-term financial goals like children’s education fund or retirement corpus. Augmenting the corpus that you are building with periodic lumpsum investments sourced from your bonus amount may be a good strategy to accumulate a larger corpus (on an inflation adjusted basis) than your planned goal and / or reach your goals faster in long run.
   
   Suggested reading: Importance of discipline in savings and investments


3. Staggered investments (STP) to take advantage of volatility: For long term capital appreciation, you may choose to invest your bonus in equity funds. In case you are worried about volatility in markets you could choose to invest the bonus amount into equity funds in a staggered way instead of lump sum. Systematic Transfer Plan (STP) will help you invest your bonus in equity funds over a period rather than at once. You may choose a liquid fund category or any other potential low risk fund of the same fund house to invest your bonus in lump sum and transfer fixed amounts at regular intervals through STP into the equity fund of your choice over the period if you expect the market to be volatile e.g. 3 months, 6 months, 12 months etc depending on the facility features. Through STP, you can take advantage of volatility through rupee cost averaging, while corpus in the low risk fund can potentially yield returns over the STP tenure.


4. Spend on upgrading your skills: In the current scenario where acquiring new skills has become sacrosanct in the fast-changing, technologically advanced work environment, allocating some part of your bonus to acquire skills that may help you stay relevant to times may be termed as a good investment too. You may consider investing in a course or certification that can improve your skills and thereby career prospects.


5. Build an emergency fund: The nature of emergency is that it strikes without warning. It is imperative that you are prepared for any untoward event like a job loss. In order to be financially stable in times of upheavals, you need to build up a contingency or emergency fund. If you do not already have an emergency fund allocated, then the first thing you may want to consider is to start an emergency fund.
   
   The emergency/contingent fund should have an amount to cover at least 6-7 months of your monthly expenses. For investors in senior corporate roles, emergency corpus covering 12 months of expenses may be required because it takes longer to find a suitable opportunity at a senior level in case of a job loss or career change.
   
   The instrument in which you save for any contingencies is very important since volatility in your emergency fund can cause financial distress in the event of an unforeseen contingency. You may choose to invest in relatively low volatility mutual fund schemes which can also provide high liquidity e.g. liquid funds, ultra short duration funds etc. These schemes, though not entirely risk free, may have the potential for long term returns.

Conclusion

In the end, bonus is your hard-earned money. Try to evaluate the long-term consequences of splurging it on a lavish vacation or making that unnecessary renovation to your house or buying another expensive gadget. Plan what you need versus what you desire, because your decision might be the difference between your financial well-being and the lack of it in the long term. Contact your financial advisor to help you plan to invest your bonus amount for your long-term financial goals or wealth creation.

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