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How would you spend your annual bonus
2018/10/24 16:49

This is a question that most of us would love to be asked more often than just once a year. But jokes apart, a bonus undeniably has a positive psychological and feel-good impact on the person receiving it. For many, it seems like a well-deserved recognition for their unstable work-life balance.

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If you have received one in the past, you will surely understand what I am talking about. And there is no denying that spending this windfall is a tempting option. Most people start planning much in advance about how to spend it.

I'm aware that asking to not spend it would be asking for too much. But I think it's important to understand why you should try to maintain a fine balance between enjoying it (by spending) and allocating it towards important financial objectives.

Remember, loans come first. More so if they are high-cost ones like credit card outstandings or personal loans.

1. Clear off expensive loans

Credit card debts are the most expensive and charge up to 30-40 percent. personal loans aren’t cheap either and range from 15 percent to above 20 percent. There is no point paying high interest if you can avoid it. And there aren't any tax benefits for these loans either. So assess the cost of pre-payment (as some have prepayment penalties) and partly or fully close these loans first.

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2. Review life and health insurance

Not having the right life and health insurance in your financial portfolio can be disastrous. Unlike investments, the luck plays a bigger role here and it doesn't give too many chances to get it right.

Most people are underinsured when it comes to life insurance. As for health insurance, they are either underinsured or dependent on employer-provided coverage.

If your existing insurances are insufficient, then it would be wise to correct this problem using some of your bonus money right away. And yes, your insurance premiums also provides tax benefits if that interests you.

(Tip - If you find it difficult to pay premiums, then start an RD to accumulate money for insurance premiums).

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3. Start an emergency fund

Do you have some savings for emergencies? Like a sudden expensive repair work, uncovered medical expense, sending money for family member’s emergency or even a temporary job loss?

These are financially scary situations and it's advisable to have some money earmarked solely for such emergencies.

Ideally, you should have about six months monthly expenses in an emergency fund. But if you are just starting, then it's a good idea to allocate a part of your bonus for this emergency corpus upfront.

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4. prepaying home loan

Using bonus to prepay the home loan is fairly common. But there is no need to go overboard. First take care of the three things discussed earlier. Once that is done and if you wish to clear the home loan soon, then consider using the bonus to prepay it.