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If you have just received your bonus, don't just splurge it. Sanjay Kumar Singh tells you how to use this windfall judiciously
1 Treat yourself and your family first
A well-documented behavioural phenomenon called 'mental accounting' suggests that people treat money from different sources differently. They tend to be more loose-fisted with 'found' money, such as bonuses, gifts and money returned by the Income Tax Department, than 'earned' money like the monthly salary. To avoid this pitfall, financial planners suggest that you go ahead and spend the first 10% of the bonus on the family and yourself. This will fulfill the pent-up desire to consume, while ensuring that the balance 90% is invested or used wisely. What you do with this 10% should be decided by your family and you collectively. You could go on a vacation, buy a big-ticket item or jewellery for your wife. While pleasing her, it will also act as a store of value that can be used in an emergency.
2 Spend on skill enhancement
We live in perilous times as far as job security goes. In the past couple of years, as growth slowed down, many workers were laid off in sectors like real estate, construction, broking and media. Given our tenuous hold on jobs, everyone needs to do a lot more to upgrade their knowledge and skills. You may also be languishing in the lower or middle ranks and need some re-tooling to move to higher ranks. To expect your employer alone to spend money on training you is not going to suffice. So, spend 10-15% of your bonus on an executive training programme, books, learning CDs, and other such resources.
3 Repay high-cost debt
This is the order in which you should repay your high-cost debt: credit card, personal loan, auto loan and home loan. There is an argument that the home loan comes at a relatively low cost and also offers tax benefits and, hence, it should not be prepaid. However, sometimes the interest is much higher than the tax deduction available: `1.5 lakh, in case of a self occupied property, and the entire amount in case of a leased property. In case of the former, prepaying makes sense. Also, the benefit will be higher if you prepay at an early stage of the loan, when the outstanding principal is high, than in the later stages. Don't prepay a loan if you might have to take another one at a higher cost in the near future. Use the bonus amount instead.
4 Fill the gaps in your financial plan
One of the best times to review your financial plan is when the bonus is around the corner. Find out the gaps in your portfolio and use the amount to fill these. Is a child going to join college in the next couple of years, and is there a shortfall in the amount you have accumulated? Use a short-term debt fund to fund the goal. Is the desired retirement corpus running low on funds? This is your chance to bring yourself closer to this long-term goal by channelising some of the bonus money in equities.
5 Use the funds to meet tax-saving goals
Your employer has probably asked you to spell out the tax-saving investments you intend to make in the financial year. If you have made the declaration, but don't have the money to make the investment, use the bonus. By investing in tax-saving instruments partly through your bonus and partly from your regular salary, you will not find yourself cash-strapped at the end of the financial year.
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