How to spend your bonus wisely

It’s that time to the year when your employer pays you a bonus for the work you have performed over the last one year. That means more money in your hands.

Do you know how to spend your bonus wisely and do you see this as a healthy financial planning opportunity or do you just splurge it away ? Your decision depends on what kind of individual you are and what your priorities are.

Let us check the various options you have to deploy your bonus.

Clear off your loans

It’s a very known secret – credit card and personal loans suck. Get rid of them. On the very first opportunity that you get, you need to first clear your credit card debts.

The interest rate on pending dues that you rotate on your credit card is atrocious – to the tune of 40% per annum. Now that is an interest rate that none of your investments is going to fetch you. If you cannot earn more than you can borrow, it is wise to close down the borrowing. So clear off your credit card dues – that is probably the most wisest way you could ever spend your bonus.

Next is line are personal loans. These have varied interest rates though not as outrageous as credit card loans. Even in the range of 15% – 20%, these are unwise borrowings to get into. If you have cleared off your credit card dues and still have your bonus left, get rid of your personal loans.

Remember that credit card and personal loans are the only two loans you want to close down before you move to other loans like car loans and home loans.

Paying a principal amount towards your home loan or clamping down on your car loan is a decision that is driven by the need  of next few items, so read on before you jump to any conclusion.

You should come to home loans last as these are good loans – money you have borrowed to build an asset (your home) for yourself.

Form an emergency fund

Basic financial planning demands you to have an emergency fund. An emergency fund is generally 5-6 months of your spends/expenses parked in liquid avenues that you can encash easily in case of an emergency.

Form an emergency fund if you do not have one. This is one of the most basic and important requirements for a wise investor. You do not want to get caught at the wrong side of a contingency and begin liquidating money from investments meant for retirement and your long term goals.

How to spend your bonus wisely ?

Insure your assets

Your third option should be to look at the need to enhance your life insurance. There are many types of life insurance policies available in the market so don’t get confused by them – opt for a simple pure term life insurance plan. It will be cheap for your wallet and is not going to shave off a whole lot from your bonus.

Start by insuring your life first. Move to other must have insurance policies that you might need.

Remember that apart from term insurance, getting a health policy (mediclaim) for your family is also very important. Opt for a family floater if you don’t already have one. Personal accident insurance policy is another cover you might want to check.

Be prudent and don’t go all out to spend your bonus on taking all types of policies. The number of policies each individual needs is different, so make sure you make a personal decision to spend your bonus wisely.

Invest

After you have exhausted your options above, based on your goal based investing strategy, go ahead and invest your windfall of gains for your or your family’s future. The investment you make could be towards saving money for your retirement or saving money for your children’s education or marriage, among others.

Remember not to invest a lumpsum amount in the stock markets. Follow the systematic investment planning route of mutual funds if you want to take the equity route. Equity investment is a very simple exercise, don’t make it complex by trading and losing your hard earned bonus.

Splurge/Spend your bonus !

I am sure a lot of readers are fixated at this !. To be fair and honest to your spending hormones, you deserver to splurge a part of your bonus as well. Cut out a percentage that you think you are ready to not invest and spend it away as you like. Remember that there is no thumbrule that dictates how much of your bonus you should spend.

Generally, I advise 20% – 25% of the bonus to be frittered away. You could buy your favourite gadget or take a dream vacation or lose it on the stock exchange. Consider this money lost !

What should be the order in which I spend my bonus

Try and follow this order to the best of your abilities.

  1. First clear off your credit card loans.
  2. Second in line are personal loans.
  3. Form an emergency kitty if you don’t have one already.
  4. If you have one, clear off your car loan.
  5. Insure your life.
  6. Insure you and your family via a health insurance.
  7. Take a personal accident insurance policy.
  8. Take other covers like home insurance and critical illness.
  9. Clear off your home loan if you still have bonus left.
  10. Invest part of the money if you still have some left.
  11. Splurge a small part of your bonus.

Was this article on how to spend your bonus useful for you ?

How did you spend your bonus ?

Comments

  1. Bonus!!! that’s news to me.
    Who gives Bonus these days?????????

  2. RaviShankar says:

    Thanks Radhey..nics info.
    I think Bonus may not mean just what our employer gives here..
    We can use above article info when ever you gets extra money say as Gifts.

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