It is appraisal time and several salaried individuals are likely to be anxiously anticipating the year-end performance bonuses.
In this article, we present a five-point checklist that details how individuals can effectively use their bonus effectively.
1. Repay Expensive Loans
First and foremost, start reducing your liabilities. Begin by repaying any expensive credit card, personal loans that you may have availed. You can also partly repay that mammoth home loan or education loan that you have taken. Although home and education loans provide tax incentives, you could repay in such a manner that you maximize the incentives, while reducing your liability.
For instance, if the interest and principal components of your home loan exceed Rs 1.5 lakhs and Rs 1 lakh respectively, you can prepay an appropriate amount such that the interest and principal components would come closer to limits stipulated above. The intent is rid yourself of liabilities to the extent possible.
2. Start a PPF account
If you don’t have a Public Provident Fund (PPF) account as yet, use the bonus amount to get started with one. PPF can make for an attractive long-term investment avenue. At present, investments in PPF earn an assured return of 8.8% per annum. Not only is the interest tax-free, investments of upto Rs 1 lakh in each financial year are eligible for tax benefits under Section 80C of the Income Tax Act. Maintaining a PPF account isn’t expensive—the minimum investment required to keep the account active is just Rs 500 per financial year. Finally, the investments are backed by a sovereign guarantee ensuring the highest degree of safety for both the sum invested and interest.
3. Start equity investing
If you can take on risk and have a sufficiently long investment horizon, you can consider making equity investment with the bonus monies. It doesn’t hurt that equities provide the best chance to beat inflation over the long haul. If you are a first time investor or don’t have an expert understanding of equities, it would be preferable to opt for the mutual fund route, as you can employ the expertise of a portfolio manager to make investment decisions for you. If you want to avoid investing a large lump sum amount at one go, opt for the systematic investment plan (SIP) or systematic transfer plan (STP) route, wherein investments into equity mutual funds will be spread over a time horizon, and you can benefit from rupee-cost averaging.
4. Set aside a contingency fund for a rainy day
Having a contingency reserve in place is extremely important. An adequate contingency reserve ensures that you can go about with your day-to-day activities even in the event of an unexpected (and unpleasant) situation arising. In effect, it ensures that you don't have to compromise on your lifestyle, even in difficult times. Make a list of your routine expenses and fixed commitments; follow this up with an estimation of the period for which you wish to cover yourself. This will help you determine the portion of the bonus amount that needs to be set aside as the contingency reserve.
5. Avoid impulsive spending
This is a tip of the ‘avoid’ variety, rather than the ‘do’ kind. Access to disposable funds often makes us vulnerable to go on a binging spree. Resist the temptations and don’t succumb to impulsive spending. Agreed, you have worked hard all year and you deserve to pamper yourself. Hence, allocate a small portion of your bonus amount for some leisure activities, but ensure that the larger chunk is prudently utilised; our recommendation here would be to fulfill the recommendations listed above.
(Senior Research Analyst Vicky Mehta contributed to the writing of this article)