The key is to distinguish between what you need and the things you desire. If you haven’t yet blown away your Diwali bonus, here are a few ideas to consider.
Set up emergency fund
It might sound baffling, but the best way to use your bonus is by not spending it. Use it to build a contingency fund to ensure that you have enough to cover basic living expenses in case of a job loss or extended illness. Pour your bonus into this emergency fund, or add to it if you already have one. The thumb rule is to have enough stashed away to cover 3-6 months of expenses, including loan EMIs and insurance premiums. However, this varies depending on factors like the number of earning members in the household and whether you have health insurance.
Start sips in equity scheme
Markets are on a roll. If you are willing to take some risks and have enough patience, equity funds can give you good returns. But don’t rush to invest in this overheated market. Stash the amount in a liquid fund, and then start a systematic transfer plan into an equity fund. This strategy has twin benefits. One, your SIP investments in the equity fund will cushion you against market volatility. Two, the amount will be out of your bank so you will not blow it away. A liquid fund will also give you slightly better returns than your bank account.
Prepay costly loans
As a rule, you should use windfalls to reduce outstanding debts. Prioritise your loans based on the interest you are paying. Credit card debt should top your list, followed by personal loans, which can charge anywhere between 12- 18% interest. However, do check if the lender slaps charges for prepayment of the loan. Consider paying off smaller loans, like your car loan, in their entirety, so that you can tick them off the list. The last to go should be low-cost loans that come with tax benefits, like a home loan or education loan.
Invest for your child’s education
Education is a major expense incurred by a parent, and it is rising at over 10% a year. MBA fees have risen 400% since 2011. Imagine how much it will be when your child is ready to go to college. If your child is in school, you should already have a college fund set aside for her. Starting early means a smaller outflow, since you have a longer investment horizon. But if you haven’t started yet, allocating your bonus lump sum to this fund is a good idea. Invest equally in both debt and equity or go for balanced funds to get the ideal asset mix.
Buy life insurance cover
Life insurance is necessary because life is so unpredictable. Use your bonus to buy a term plan for yourself. Term plans are very cheap when bought at a young age. A 30-year-old will pay only Rs 10,000-12,000 per year for a cover of Rs 1 crore for 30 years. A 40-year-old will pay roughly Rs 18,000-20,000 per year for the same cover for 20 years. If you don’t want a recurring payment, go for a single premium term plan. These plans do charge a large premium up front, but do not require renewal. A one-time payment takes care of all your life insurance needs.
Buy health cover for family
The pandemic has made a lot of people realise the importance of health insurance. Yet, many people rely solely on the group insurance cover from their employer. Group covers may not provide sufficient coverage. This is where your bonus can come handy. Buy a family fl oater health plan to cover all family members. A Rs 10 lakh fl oater plan that covers a husband, wife and two kids will cost about Rs 20,000-25,000 a year. But health insurance premiums are eligible for tax deduction, so the effective cost in the 30% tax bracket will be Rs 14,000-17,500.
Put money in the NPS
Want to save tax? Invest a part of your bonus in the NPS. Under Section 80CCD (1b), up to Rs 50,000 invested in the scheme is eligible for deduction. This is over and above the Rs 1.5 lakh investment limit under Section 80C. However, keep some things in mind before you invest. NPS has a very long lock-in period, and the money can be withdrawn only when you retire. But the long lock-in also ensures disciplined investing over the long term. It makes sense to invest in NPS if you have a very high tax outgo and want to cut it down.