It’s that time of the year when your employer takes cognizance of your efforts and rewards you with a yearly bonus. Appraisals are always welcome, especially, if it is a decent amount getting added to your monthly package. Irrespective of the inflation effect wherein a good amount is still spent on paying extra for essentials and higher equated monthly instalments (EMIs), a lot can be accomplished with this meagre raise if you remain keen on efficiently handling your money matters.
If you have recently received your bonus and are still unaware of how to optimally use the extra hard-earned money, you may consider working on any of the following
Prepay your home loans
If you have a home loan whose interest rates have risen in the past couple of months due to continued RBI repo rate hikes, it makes sense to prepay the loan instead of opting for a prolonged home loan tenure. You can use the extra amount to prepay the loan, thus, allowing you to get rid of the debt early in life.
Take, for example, you have taken a home loan of ₹25,00,000 in April 2022 for 15 years at 8.5 per cent interest rate. At this rate, you have to pay a total interest of ₹19,31,328. The total repayable loan amount would be ₹44,31,328.
Assuming that your employer company has announced a monthly bonus of ₹9000 in May 2023, thus, allowing you to start prepaying the loan amount just a year after having sought the same. Using this extra amount to prepay over and above the EMIs can help you save a lot of money on interest while helping you get rid of the loan early in life. The total outgo, in this case, would be ₹36,88,533, thus, helping you save ₹7,42,795. Also, the loan would be repaid by September 2031 instead of you having to slog under the debt burden till April 2037.
Expanding your emergency corpus
There is a lot of effort that goes into saving enough money to meet emergency expenses. Unforeseen circumstances can be a cause of financial concern, and many people are forced to take personal loans to pay for sudden expenditures.
With so many companies laying off their employees and many families being forced to relocate to rural areas to save money, it makes sense to work on your emergency fund while there is still time. Even if you may have bought a health insurance plan, not all medical expenses are covered under the policy, which is why having some extra cash in hand helps. Use this bonus to build a contingency fund that you can use when you need it most. Though there is no thumb rule to decide how much money you must have in your fund, ensure that you have at least six months’ worth of income in this fund.
Buy or extend your life insurance cover
Do you have a life insurance policy? Or have you checked if you have bought enough insurance coverage? Beginners buy nominally sized insurance policies without realizing the significance of the coverage amount sought. If you have bought a small insurance policy, you can use this bonus to either buy a new insurance policy with a bigger coverage amount or opt for an extension of the existing policy to higher insurance coverage.
Start a new SIP or step up your equity investments
New-age investors are inclined to invest in equity mutual funds. With the bonus in hand, you can easily start putting money into your mutual fund investments through regular systematic investment plans (SIPs). This way, you can start investing in equities quite early in your life. Lump sum investments may not always be possible, so use this opportunity to earn market-linked returns through SIP investments.
Assuming that the bonus amount invested in equities through SIPs is ₹9000 every month, let us understand with the help of the following example
Monthly Investment: ₹9000
Expected return rate: 12%
Investment tenure: 10 years
translates to
Invested amount: ₹10,80,000
Estimated returns: ₹10,11,052
The total value of the investment: ₹20,91,052
However, if you are already investing your money in an equity fund, you may consider stepping up your equity investments. A standard 10 per cent step-up in SIPs is advised by personal finance experts to counter the effect of inflation on our earnings. The below-mentioned calculations will help us understand how stepping up investments can help us grow enough returns.
Monthly investment: ₹10,000
Annual step-up: 10%
Expected return rate: 12%
Investment tenure: 10 years
translates to
Invested amount: ₹19,12,491
Estimated returns: ₹12,72,341
Total value of earnings: ₹31,84,832
You may also consider putting money in a debt fund to expand and balance your investment portfolio, thus, lending you the much-needed stability from returns on bonds and government securities (G-Secs) during market downturns.
Add some gold to your investments
Gold prices are rising unlike before wherein previous years when there would be occasional spurts in gold prices followed by a long-term stagnant phase. Economic uncertainties have pushed up gold prices. This yellow metal is set to get costlier with ubiquitous geopolitical tensions, thus, underlining the importance of including some gold in your portfolio.
Gaurav Rastogi, founder and CEO, Kuvera.in shared, “For Indian investors, gold has provided a good macro and currency hedge and it should be used as such. A 15-25 per cent allocation to gold based on risk preferences helps diversify away from tail risk.”
Renew your financial goals
This may seem odd when someone asks you to review and renew your financial goals with your bonus amount. The bonus amount, however, meagre it may seem is definitely not the last appraisal you will be enjoying in your life. If you are a beginner, it makes sense to review your financial goals and try to sync them with the bonus amount credited to your account. You do not decide on an enormous financial goal in one go; instead build it step by step so that you can have a more secure financial future.
The bonus amount is the monetary compensation for the efforts that you put in. Use this to show some love to yourself; this year, use the bonus amount to strengthen your financial future.
