The first thought to cross anyone's mind when we get some extra money on our hands – Gosh! I can finally buy the thing I have been craving for so long!
This 'thing' can be a new mobile phone, clothes, a holiday or may be a gift for your loved ones. While you surely have earned every single penny of this bonus and you should and you must use it to enjoy your life, remember the key principle of your financial future – discipline.
You need not be a personal finance expert to decide what to do with all those bonuses nor is it imperative for you to save and invest all. You may spend some depending on what you need and if the purchase would be worth the value for your money. However, if you are planning to retire early or have some financial goal in mind, it would be wise to tick off desires and focus on spending only on what you need most.
Spend vs Splurge
Once you have the bonus in hand, decide on what you must do next. Allocate how much of the amount you would like to spend, the percentage of the amount you would like to invest while the remaining can be used to get rid of some nagging debt.
It does not hurt to spend on yourself, especially, if you have been longing for a much-need break or yearning to take your family out on a vacation. Reuniting with your friends on the hills or romping near the seashore can do a lot of good to both your body and mind. However, spending your money does not mean that you gamble all your money at the casino. Spend, but do not splurge should be the ‘mantra’ that will not only help you enjoy but ensure complete control of your finances.
Prioritizing paying off your debt first serves better than rushing to spend that bonus amount. While it may feel good to pamper yourself with that extra amount, it may hurt your financial plans in the long run.
Pay off high-interest debt
Get rid of that unpaid credit card debt or lingering personal loans, if any. Look if you have some extra bonus left to prepay your loan amount. Some credit card companies charge as high as 40-45 per cent while the interest on personal loans can go up to 12-15 per cent owing to their unsecured nature. Do not take your debt lightly. Seemingly innocuous at the beginning, burgeoning liability can cause you to fall into an unseen debt trap.
Add muscle to your emergency fund
You never know when the next emergency would strike. Having an emergency fund in place means that you have enough money in hand to meet contingent liabilities. If you have not built an emergency fund to date, it is time to create one. If you have set up an emergency fund, allocate a part of your bonus to strengthen the fund corpus. Remember that you should have enough funds in it to pay off your necessary expenses and bills for the next six months in case of job loss or sudden unemployment due to the death or accident of the family’s breadwinner.
Plan your insurance
Have you planned your insurance? Do you have the necessary health insurance or term insurance needed to take care of your family in case of sudden need? If not, it is time to plan your health insurance. Medical treatment is now a costly affair. Middle-income people are just one hospital away from getting pushed into a life of debt and poverty. Opt for cashless health insurance to ensure quick treatment while your insurance company takes care of the hospital bills. Term insurance ensures life-long financial security to your loved ones in your absence in lieu of very nominal costs.
Prepaying home loans
Home loans may be cheaper than ever before, but that should not be enough reason for you to prolong your loan tenure. Consider prepaying a part of your loan to avail the dual benefits of low equated monthly instalments (EMIs) and a shorter loan repayment period. Use your bonus and salary hikes to pay in lump sum towards your home loan. A higher monthly salary can be used to increase your EMIs, thus, ridding you of the unwanted debt quickly.
Load up on your investments
Death is not the only constant truth in life. Inflation is a bitter truth that haunts our lives on an everyday basis. That is why many financial experts advise their investors to prep up their systematic monthly instalments (SIPs) every year to beat the inflation effect while also gaining from the compounding effect on money. Increasing investments every month or year can help you reach your financial goals faster and that is why you must consider increasing your mutual fund SIPs or allot your extra earnings to a new mutual fund with high returns and a low expense ratio.
Most people look at bonuses or increments as an opportunity to spend or splurge on that long-awaited holiday destination or buy a hi-end electronic device. While there is no harm in spending once in a while, remember the much-acclaimed investor Warren Buffett’s famous quote, “If you buy things you do not need, soon you will have to sell things you need.”