Money
Got your annual bonus? Here are smart ways to utilize it
Summary
- Utilize your annual bonus to pay down high-interest debts, such as credit card balances, which can significantly reduce financial burdens and free up income for other goals.
- Consider investing in the National Pension Scheme (NPS) to maximize tax savings and build a robust retirement fund
As the season of bonuses arrives for many working professionals, deciding the most effective way to utilize this annual financial boost can significantly influence one’s fiscal health.
From eliminating high-cost debts to investing in personal growth, experts provide a roadmap for converting these lump sum windfalls into lasting financial benefits.
Paying down high-cost debt
One of the most effective uses of a bonus is to reduce or eliminate high-interest debt. Credit card balances, known for their steep interest rates, can quickly escalate the total debt burden.
Using bonuses to partially prepay outstanding loans, especially those with high interest, should be a priority, advises Vishal Dhawan, founder of Plan Ahead Wealth Advisors.
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This move not only reduces the amount owed but also brings down future interest payments, freeing up income for other financial objectives.
Establishing a financial safety net
Creating an emergency fund is an essential strategy for financial security. Experts often recommend saving enough to cover six months of living expenses in an easy-to-access account.
This fund acts as a financial buffer against unexpected expenses, such as medical emergencies or job loss, and prevents dependency on credit during crises.
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"It is essential to address any gaps in your financial safety, stability, and aspirations. If there is a gap in your safety or contingency fund, that should be prioritized," points out Tarun Birani, founder and chief executive officer of TBNG Capital Advisors.
Staggered investing
Investing your bonus can have a profound impact on your financial growth. Whether you choose to invest the entire sum immediately or opt for a staggered approach, the strategy can significantly influence your portfolio’s performance.
"Consider a staggered investment approach by placing your bonus in a liquid fund and then using a systematic transfer plan (STP) to gradually deploy funds into the market. This helps mitigate risks associated with market volatility," suggests Vijay Kuppa, chief executive, InCred Money.
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STP gives you rupee cost averaging, which is a strategic investment method where a fixed amount is invested at regular intervals, irrespective of market conditions. This strategy mitigates the impact of market volatility, enabling the purchase of more units when prices are low and fewer when prices are high.
Tax-saving
Your bonus can also serve as an opportunity for tax-saving investments. For instance, investing in the National Pension Scheme (NPS) allows you to claim an additional tax benefit of ₹50,000 under Section 80CCD(1B) of the Income Tax Act, beyond the ₹1.5 lakh deduction limit under Section 80C for a financial year.
Beyond its tax advantages, NPS is an effective retirement planning tool. It offers a range of investment options, including equity, corporate bonds, and government securities. Moreover, NPS subscribers have the flexibility to make up to three partial withdrawals for specific needs, such as funding children’s education, covering marriage expenses, or addressing medical emergencies.
Investing in self
Beyond financial markets and debt payments, consider using part of your bonus for personal development.
“A portion of the bonus can be used to upgrade one's professional skills, whether through a course or a seminar," says Dhawan.
Additionally, setting aside funds for personal enjoyment, like a family vacation or a meaningful gift, can enhance life satisfaction and create cherished memories.
