How to use your Diwali bonus effectivelyhttps://indianexpress.com/article/business/banking-and-finance/how-to-use-your-diwali-bonus-effectively-5445843/

How to use your Diwali bonus effectively

While we cannot do without loans in our financial portfolio, timely repayment is much needed to stay financially fit.

How to use your Diwali bonus effectively
If you have multiple loans going, prioritise paying off the high-interest loans such as personal loan and credit card bills. (Representational)

Diwali brings all good things and that includes a bonus from your employer. It’s a reward from the employer for all the hard work you have put in at work during the year. And we all look forward to this windfall, yet often lack a plan to put the money to good use. If you use this money smartly, it can increase the benefits manifold.

Let’s explore some smart ways to use the Diwali bonus effectively

Repay the existing debts

While we cannot do without loans in our financial portfolio, timely repayment is much needed to stay financially fit. Any surplus cash must be used to pay off outstanding dues on credit card bills and loan EMIs to avoid the burden of high interest and falling into a debt trap. If you cannot prepay the entire loan amount, pay at least a part of it. This will reduce the interest outgo to a certain extent.

If you have multiple loans going, prioritise paying off the high-interest loans such as personal loan and credit card bills. Timely repayment will also keep your credit score from getting spoilt. However, before you make an attempt to pre-pay/ foreclose a loan, check if there are any penalties that are applicable. Do the math and see if you are benefitting by closing the loan. If it’s a home loan, you might want to factor in the tax benefits available on it.

Beef up your investments

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We often delay saving up for our long-term goals such as retirement or children’s education, waiting for a considerable rise in our salary. This sometimes leads to compromising on the size of our investment fund as well. Make a habit of using all erratic lump sum amounts such as the Diwali bonus to boost your investments for long-term goals. Use it to reach your financial goals faster or to meet any shortfalls. Your initial amount may be small but in the long run, it can help you accumulate wealth, reduce the gap between the required amount and your accumulated amount.

Build a contingency fund

A contingency fund is a must to build a line of defence against any unforeseen circumstances such as job loss, a sudden health hazard etc. This fund needs to be liquid in nature, as you need to be able to use it in case of any emergencies, or when there is a shortfall in income. If you don’t have a contingency fund in place, make use of your bonus money to create one. If you already have a contingency fund in your financial portfolio, you can use the bonus to beef it up. Invest in a low-risk, liquid investment asset such as a bank FD or mutual fund liquid scheme. Aim for a corpus worth 6-12 times of your monthly income.

Invest in tax saving schemes

Don’t wait for the tax season to set in to plan your investments. Use your bonus money to invest in tax saving schemes such as PPF, ULIP, ELSS etc. Waiting for the last minute will only make you take decisions in haste. Start early to compare and find the assets that best suit your investment plan and are capable of saving tax effectively.

The writer is CEO, BankBazaar. The article has been published in collaboration with BankBazaar. Opinions expressed are those of the author.