How to make the best use of your annual bonus income

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After a no-show for the past couple of years, Rishi is expecting an annual bonus this year. He is eagerly looking forward to it, though he is yet to decide what he wants to do with it. In the past, he has seen large non-routine incomes being spent, without anything to show for it. This time around, especially after the learnings from the pandemic, he wants to make sure that he does something constructive with the money. He is considering prepaying some of the loans he is servicing with great difficulty, while his friend suggests he invest a portion of the money. Rishi has a saving and investment plan, which he has mostly been able to adhere to. He has been saving to buy the latest model of his dream car, which he feels he deserves. He would like some advice on allocating his bonus money among all these things he has been considering.

Rishi needs to ask himself whether this money was accounted for when he had drawn up his budget and savings plan. If he had, then he should just stick to the plan and not consider the bonus money as extra. If it is indeed an additional unexpected income, then he must evaluate his options and decide what he wants to do. While he is making the decision, it will be a good idea to move the money into a liquid fund, so that it is not spent randomly.

Prepaying an expensive loan will help him save on interest costs and free his regular income from the EMI obligations. However, before considering prepaying a portion of the home loan, he should look at retiring credit cards and personal loans which carry a higher interest rate. If he finds his current job risky and since the pandemic is not over yet, he may like to keep his loans low.

Rishi should use a portion of his bonus to catch up with his investment plan, in case he has fallen back. Since he has been disciplined in making his planned investments, it would be a big motivator if the money helped him reach a goal he has been looking forward to. Using the money to hasten a goal for which savings are already being made, is a good idea and acts as a reward. But using it to initiate the purchase of a car with a loan, will only expand his monthly expenditure with the additional EMIs, which should be avoided.

While making a decision, he should simply ask himself if the allocations he is considering would have a positive impact on his financial situation. The outcome should be something that he can identify as the result of the bonus he earned. This will help him make the allocation that he will be happy with.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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