Bonus money is a windfall and you should know how to strike the perfect balance between living the moment and allocating it towards your financial goals.
Refill Your Emergency Fund
Although we all pay for insurance (life and medical) to deal with a potential financial crisis, financial experts still recommend building an emergency fund that takes care of our daily expenses for about 6-8 months, should we go jobless and remain unemployable for that period.
Although most of are pretty optimistic about our future, we can’t still deny contingencies such as damage to property and accidents.
You should build your emergency fund based on your spending patterns (monthly running expenses) in the past six months. Review the fund every quarterly and see if it is enough to meet your running expenses for six months during emergencies.
When you get bonus salary, revisit your emergency fund and use a part of your bonus money to refill it. There are a number of instruments in which you invest: recurring or fixed deposits, liquid mutual funds, and debt funds are some of them.
Reevaluate Your Insurance Needs
Even though you have invested in insurance policies, you still need to reassess your insurance needs from time to time. Insurance needs change based on a number of factors such as your family’s spending habits, income fluctuations, and rising inflation. The reevaluation process helps you put things in perspective and helps you insure your family adequately.
When you get your bonus money, reconsider your insurance needs and see if you need to invest in a fresh insurance cover or supplement the policies you already have.
Prepay Your Loan
Currently, the interest rates are one of the lowest and the banks are also offering loans at lower interest rates. Naturally, the potential returns on fixed income instruments have also gone down. Therefore, it’s wise to use your bonus salary towards prepaying any principal loan balance you may have.
Prepaying your principal loan amount will significantly lower your interest payments in the long run. In doing this, you will also secure yourself against any potential rise in interest rates in future.
However, prepayment is not a smart idea if you are almost the end of your loan tenure. Your existing home loan helps you maximize your tax savings.
Recommend Reading: 5 Traps for Your Home Loan Prepayment (How to Avoid Them)
Get Rid of Outstanding Debts
Do you have any outstanding personal loans or credit card balance? Then it’s a good idea to use your bonus salary to clear those debts on a priority. Both personal loans and credit card late payments carry a very high rate of interest. Plus, delaying those payments affect your credit score severely, making it just as harder for you to avail a loan in future. The surplus money you get from in form of salary bonus is a great opportunity to get rid of the debts.
Reassess Your Financial Goals
The investments you make should be aligned with your financial objectives. As the goals evolve with the passage of time, so should the investment. When you get your annual bonus, provision a part of it towards your goals in order to achieve your goals in a quick period of time.
What about My Vacation Plans?
The smartest way to treat your annual bonus is to provision part of it towards your financial goals and then use the rest of it to do anything else you want: buying a new cellphone, new vehicle or even buying a vacation holiday package for the family.
Prioritizing your long-term objective is using your surplus income to secure yourself against future contingencies.