A bonus or an appraisal is the acknowledgement of the hard work you put in a company. Although each company has its own appraisal cycles, by now most companies dole out bonuses or financial increments to their employees for their performance.
If you have received a decent hike or a one-time bonus, you might be exploring options for using this money. Many often splurge such hikes or bonuses on unnecessary and materialistic needs. However, the better way is to put this surplus income or bonus in instruments that will have long-lasting financial impact.
In this article, we take a look at smart options to use your increment and bonuses.
Pre-Pay Your Loans
You can use the surplus income or bonus to pay off debts. With the interest rates rising, it makes sense to use the surplus income to reduce your loan balance by principal pre-payments. This way you will save money on the interest paid on loans in the long-run, and would also minimise the impact of future rate hikes. However, if you are nearing the end of your loan tenure, it is better to avoid pre-payments to avail maximum tax benefits on Home Loan principal and interest outgo. You can also clear outstanding balance on any Credit Card or clear high interest rate debts like personal loan.
Invest In Mutual Fund Or Start A SIP
If you have received a one-time bonus, then you can invest this lump sum amount in mutual funds that suit your financial goals. The compounding benefits and the return on the particular mutual fund will help you create wealth. If you have got an increment, then you can start a monthly systematic investment (SIP) in Mutual Funds. If you have already started an SIP, you can step up the monthly contribution in tandem with your hike percentage. This would not only inculcate a habit of saving, but also help you in creating wealth good enough to beat inflation in the long run. You can also increase the amount of your monthly SIP with the increased income. It is best to make any move in mutual funds after consulting your financial advisor.
Assess Your Insurance Needs
Life is unpredictable, and so it is always wise to have protection, a cover that can bail us out of sudden eventualities. Insurance covers provide financial security for ourselves and family. If you are the sole breadwinner of your family, a Term Plan provides your nominee a sum assured to maintain the same lifestyle in your absence.
After assessing your family’s insurance needs, you can use the increment to increase your cover. Similarly, a comprehensive Health Insurance helps you meet rising medical costs and ensures quality treatment. Even if you have a company health insurance, it’s always advisable to buy an individual health plan to help you in the long run, even when you don’t have a job. You can also ask for critical illnesses rider to be added to your policy to secure unexpected expensive medical procedures.
Increase PF contribution
Usually 12 per cent of your basic pay is contributed towards the Employee Provident Fund. You can get this contribution increased based on your convenience and financial needs. If you have got a raise in your salary, then you can opt for increasing your contribution to PF.
Create An Emergency Fund
There can be a situation in life when you may face emergencies like job loss, health problem, damage to property etc. While many of these situations can be handled with appropriate protection, but it is always helpful to have ample liquidity in hand. This is where emergency funds come handy.
In case you have received an annual bonus or hike, then use this surplus money to invest in instruments that can provide immediate liquidity. After assessing your expenses for 6-8 months, you can invest in instruments like Fixed Deposits, liquid mutual funds and short-term debt funds to create an emergency fund.
You can also reassess your financial goals and direct a part of your bonus or hike towards these objectives. This may help you achieve your goals faster. There’s always the urge to spend the bonus on enjoyment, but it’s also important to use this seasonal income smartly to create wealth, secure ourselves, and not allow any income wastage.
(The writer is CEO, BankBazaar.com)