After a year of turmoil, hardship and working over and above the required contracted hours, people get rewarded with year end bonuses. There is a
twinkle in every eye eagerly waiting for the bonus letters to be handed over on what I call the ‘B-Day’.. not a birthday but a Bonus day. And then the final day comes in when the bonus is credited in the bank account. This article is not aimed to give tips on getting a better bonus – that job is done best by the people who get fat bonus cheques. Rather, I am trying to give some tips on how to make the best use of the well & hard earned money !
Split your overall bonus amount into three chunks and you may want to use each of the chunks in the following ways :
Pay off Your Creditors
This item should be the first thing in your mind before even thinking about the new car you have been eyeing for a while ! And the order of payment could be :
A. Friends & families from whom you may have borrowed interest free loans – It makes perfect sense to repay their money at the earliest and not to enrich yourself with some one else’s funds. If you are not having loans from your friend and families – then kudos. For those who are lucky and are sitting on a financial support of their loved ones, no time can be much better than your B-Day to repay off this open debt. Remember one thing, irrespective of how rich your relatives are, they do need the funds back and even if they are not actively chasing you for the repayment, they are passively eyeing it.
B. Credit Card Loans – These are most costly loans which you may have taken to allow you to stretch your financial bed sheet beyond the means. Hence, make sure that you repay it when you have funds handy. Extending the credit card repayments via monthly EMIs is a financial destruction of your wealth.
C. Personal Loans – After credit card loans, these are the next in line which you must kick off from your balance sheet list of liabilities. Generally they are over 15% rate and it makes no sense to hold on to these loans just to have more fun from your Bonus.
D. Housing Loan / Mortgage – If you are lucky for not having any of the loans mentioned in A to C above, you may want to do a part repayment of your housing loan to bring down your loan outstandings. A home loan may be a very big chunk and hence you may want to prepay it by a specific % of your bonus proceeds rather than putting your entire bonus proceeds into the prepayment. How much you may want to repay would depend both on your bonus amount and outstanding Loan. Using 25% of your bonus to repay your loans may be a good starting point.
Do Justice With Your Future
If we are living, the future will come. And if you aspire for a comfortable living in the future, you may have to sacrifice some amount in your present so that it can fund your future. After paying of your loans, you should invest a respectable percentage of your bonus amount to fund your future. It can be in either of the following ways :
- Pay into your yearly tax investments such as PPFs, NSCs, etc.
- Top up your mutual fund SIPs. For more on mutual funds SIPs, you may want to read How SIPs Work.
- Open Fixed Deposits in line with our article Fixed Deposits – How to Benefit the Most Out of them.
- Buy Equity Shares; or
- Invest in a Property.
Enjoy your Current Life – As Today Will Never Come Back
Whats the use of a future if you are not living a decent life today. We all have future aspirations and dreams, but it does not mean that you need to sacrifice the current to such an extent that it becomes worthless to wait for the future. You have toiled for a year to get this bonus amount and it makes a perfect sense to reward yourself and your senses for that well deserved luxury holiday or a car you have been craving for ! Splash it out – Get the next upgrade of your cellphone (even though your current phone is just a year old) or your laptop so that you can show off amongst your friend circle. Buy a luxury holiday for your family with whom you couldn’t spend quality time as you were busy in earning the year end bonus.
If you would notice, I have purposefully ordered the way you may want to spend your money. If you would follow the above order, it would result in a prudent financial discipline. Lets see the after maths of spending the bonus in the reverse order :
- Thomas got Rs. 5 lacs of bonus. Wow ! is what he said;
- He went and bought a 30K – iPhone 4s and a brand new laptop for Rs. 70K. One lakh gone !
- He booked an foreign holiday for his family – a trip to Swiss for Rs. 2 lacs. Wonderful, they have been craving for this holiday for past 3 years. Three lakh gone !
- Got a new AC and changed his wardrobe – for Rs. 50 K. Got a new sofa set with recliners – 50K – Four lakh gone ! Wake up Mr. Thomas !!
- Now he realises that he has got One lakh remaining. He does a quick maths and arrives at the following :
- Need to pay off his credit card balances of Rs. 50K on which he is paying 20% Interest;
- Personal loan of Rs. 1 lac is denting his finances with an interest of 16%;
- An Outstanding Home Loan balance of Rs. 30 lacs !
- Thomas sadly realises his situation and pays of Credit card dues of 50K and another 50K of the personal loan.
- Unfortunately, even after a lavish bonus, he is sitting on a 50K personal loan and the same amount of home loan !
Could Thomas have done better ?
If I was Thomas, I would have done the following with my 5 lacs bonus :
- Pay off my Credit card dues of 50K and avoid paying around Rs.1000 as monthly interest !
- Pay off my Personal Loan in full – of Rs. 1 lac – saves me around Rs. 1300 on interest itself. This would also ease up pressures on my monthly cash outflows in the form of monthly loan installments which I was paying on Personal Loan & Credit Card dues.
- After above 2 steps, I would have Rs. 3.5 lacs remaining which I shall judiciously spend as follows :
- Prepay my home loan by Rs. 1 lac;
- Top up my existing Mutual Fund investment by Rs. 1 lac
- Splash remaining 1.5 lacs on what so ever my family desires – call it holiday, necessities or luxuries.
The above approach would prevent me from making wasteful spendings which are generally an outcome of an excessive cash inflows. If a person removes a significant portion of the one off cash inflows, it shall assist him in spending the remaining funds in a manner which would be most useful and materially gainful !
Happy Responsive Spending
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