Plan your finances!
It is festival time and that time of the year when employers give out bonuses to their employees, popularly termed as festival bonus. While the name of the bonus indicates that it is given out during festival season and therefore can be used to fund expensive purchases, one must remember that spending on luxuries unnecessarily just because of receiving a festival bonus does not make sense.
There are people who change their furniture or electronic equipment in their houses every 2 or 3 years simply because they receive a lump sum amount from employers during the festival season. This bonus can be used for other purposes as well, which can enrich your financial life to a large extent.
Here are some ways to make best use of your festive bonus.
- Repay expensive loans: Expensive loans can eat into your cash flows. Loans such as personal loans or credit card loans, which are unsecured in nature, carry a very high interest rate. Such loans also do not give you any tax benefit. If you have high cost loans in your balance sheet, and receive a bonus, it would make sense to repay these loans. Even if you are unable to repay the entire loan, a part prepayment of such loans should be done in order to save interest costs.
You can also use the lump sum amount to part prepay home loans or car loans. Home loan prepayment charge has been waived by RBI. Therefore, one can repay home loans any number of times in a year. Use the bonus to prepay home loans and bring down the tenure of the loan. This will reduce the overall interest outflow. However, make sure you prepay to the extent you continue to receive tax benefits. Also, it would be wise to do a comparison between what you can potentially earn if you invest this money vis-à-vis if you make payment of the loan, and then take a call.
- Start Emergency Fund: An emergency fund or a contingency fund is a pool of money which can be used by you in the case of an emergency. Financial experts recommend atleast 6 months worth of expenses to be set aside in the form of an emergency fund.
If you have not done so yet, the festival bonus amount can be used for this purpose. The nature of an emergency fund is to fund emergencies. Therefore it has to be invested in instruments which not only give a return, but which are also high on liquidity.
- Invest for Retirement: Retirement goal is something which is conveniently neglected by a majority of people. Companies constitute a mandatory Employee Provident Fund or Pension Fund for this purpose, contribution to which is deducted on a monthly basis from the employee’s salary.
However, beyond this, many people do not bother to plan for retirement. It is important to start investing in retirement friendly investments like the Public Provident Fund or National Pension Scheme to boost the retirement corpus. If you are young and have a long time away to retire, you can also start regular investments in diversified equity mutual funds. On receiving a festival bonus, one can use the funds to start investing for retirement.
- Set aside for a short term goal which has not been planned for: Goals can be long term or short term in nature. People usually plan for long term goals like children’s education or marriage. However, if there is a short term goal like funding a sibling’s wedding or buying a car, people do not plan for this in advance. It may also be difficult to pool money from your savings on short notice. Using the festival bonus can help in meeting such short term goals, without having the need to borrow from the bank or withdrawing from a long term investment.
- Purchasing a big ticket item: If you have put in place the above critical activities, you can use the festival bonus to purchase a big ticket item you have been planning for long. This can either be purchasing electronic items or furniture for your house or even buying a mobile or laptop for yourself. Remember to check out various offers and compare the options before making your purchase decision. It is always recommended to do a thorough research before taking the plunge.
The best way to go forward is to use the festival bonus partly to fund big ticket purchases and partly to meet critical financial goals in life. This will not only help in putting your finances in order, but will also fulfil needs of your family. Achieving a fine balance between the two can help in leading a financially secure life.