How to utilise your annual bonus

Financial Planning | admin | October 25, 2011 at 5:16 am

Hemant Gopalan has received his annual bonus and doesn't know how he should use it. In the past, he has spent such large, non-routine income without anything to show for it. This time around, Hemant wants to make sure that he does something constructive with the money.

He is considering prepaying some of the loans, but his friend has advised him to invest a portion of the money. Hemant has a saving and investment plan, which he has adhered to for most part. He has been saving to buy a top-end music system and has also been considering a new car. How should Hemant spend the bonus?

Hemant needs to ask whether he had accounted for this money when he drew up his budget and savings plan. If he had, he should stick to the plan and not consider the bonus money as extra. If it is indeed additional, unexpected money, he must evaluate his options and decide what he wants to do. While he is making the decision, it will be a good idea for him to move the money to a liquid fund so that it is not spent.

Pre-paying an expensive loan will help him save on interest cost and free his routine income from the EMI obligations. Hemant should first look at retiring credit cards and personal loans, which typically carry a higher interest rate, before considering pre-paying a portion of the home loan. If he sees his current job as risky, or likes to change it, he may like to keep his loans low.

Hemant should use a portion of his bonus to catch up with his investment plan, in case he has fallen back. Since he has been disciplined in making his planned investments, it would be a big motivator for Hemant if the money helped him reach a goal he has been looking forward to, such as the music system. Using the money to hasten a goal for which savings are already being made is a good idea, and acts as a reward.

However, using it to initiate a purchase of a car with a loan, will expand his monthly expenditure with the additional EMIs, which should be avoided. Hemant should apply a simple rule in making his decisions. He should ask himself if the allocations he is considering would have a positive impact on his financial situation. The outcome should be something that he can identify as the result of the bonus he earned. This will help him make the allocation that he will be happy with.