Diwali is right here & so the Bonus!
Every year, many organizations pamper their employees with ‘Diwali Bonus’!
Where it was a miss for last 2-3 years due to pandemic, this year, many companies have resumed to give their annual bonus on Diwali.
Well, many of you must have received it by far & many are still waiting for it!
Amount of the bonus varies from company to company & cadre to cadre.
Some give the bonus equivalent to the amount of 1 month salary where some give half of it. Some give it in kind.
If you are one of those employees who have received or about to receive your Diwali bonus & still contemplating on how to utilize it, then here are simple solutions that can help you to arrive at right decision.
Yes, I am giving you this formula to simplify your solution!
When you receive the amount of bonus, divide the amount in the ratio of 20: 80.
Here, spend 20% of the amount on youself, family or home for the things you wish to purchase.
Remaining 80% can have dynamic use.
For this, let’s consider two categories-
- People who have loans & liabilities
- People who do not have any debt burden
Why these two categories?
People who need to opt for loans for various reasons like purchase of vehicle, house or to pay for something important by taking personal loans, have different priorities when they receive money.
Paying respective EMIs is the obligation to them every month.
Whereas, people who are ‘debt-free’ have no obligations but different choices to spend or invest their money on.
When you have too many options but need to select most suitable one, then these categories will make it simpler.
Now, lets consider how these two different categories can spend 80% of the Diwali Bonus!
Category 1 – People with Loan & Liabilities:
Dear loan applicants, its ok if you have taken loan to buy or avail something really important; like buying your own house or to a car to commute daily.
But, if you have other loans like personal loans or credit card loan, which you applied to get some ‘lifestyle upgradation’ for you, then pause & think.
Applying for ‘loans’ is not bad, but one must think about the real reason before applying the one, its potential EMI burden & how long you need to bear the same.
Coming to the main point, you should use the amount of ‘Diwali bonus’ to pay off some % of your loan burden.
80% of the amount received, you should use to ‘pre-pay the loan amount that you are liable to pay’.
Now, what to do if you have multiple loans?
First, list down all of them, with rate of interest applicable, tenure left & amount of EMI that you pay.
First, choose the loan with short duration & high rate of interest e.g. Personal loan or credit card loan.
Pay off the amount from bonus received to pre-pay the chosen loan.
This will reduce your debt burden by at least some extent.
Why to prioritize such pre-payment of loan?
Because debt free= stress free.
Such pre-payments can reduce the stress at least by some extent.
Please note that, every loan has its own terms & conditions to check about pre-payment. Kindly refer, talk to your respective loan provider & then initiate the same.
Category 2: People who are debt free
People who do not have any loans & liabilities, are free to choose the way & option to deploy their bonus amount.
However, if your do not have loans this doesn’t mean you do not have responsibilities to cater to!
You can have future goals like child education or buying your own house!
For such goals, start preparing now!
This Diwali, can be a good start to initiate your ‘goal-based investments’.
First, decide on your future goal. This will help you fix your investment tenure. Understand your risk appetite too, means understand ‘how much risk you can bear on your money invested’.
When you set these basics, then you can short list suitable investment option!
Choose the right one & start investing this Diwali!
If you do not have any such goals, then you can explore below options to utilize your bonus money received!
- Keep aside money equivalent to your yearly investments like Public provident fund:
Some people, make yearly investment like Lumpsum investment in Public Provident Fund. The money from Diwali Bonus, you can invest or keep aside to utilize for the purpose. If the amount received is more than the required amount of investment, then you can invest the remaining amount in other suitable option.
- Yearly payments like Insurance Premium:
Everyone has life insurance policies, vehicle insurance policies, etc where they need to pay premiums. If you have such yearly premium to pay for, then calculate the amount & keep aside the equivalent one from the bonus money. If the amount is excess then, invest it in suitable option. If the amount is lesser than required, still you can keep it aside to pay off the insurance premiums.
Insurance policies are pillars of our personal finance, one should not skip it any time.
- Invest for long term:
If you do not have any specific goal, can take care of yearly investments & payments as mentioned above, then still ‘invest the bonus money for loan term’.
Choose suitable option like equity or equity mutual fund, invest your bonus money in it.
Stay invested for long term. This will enable you to gain potential returns in long term, which can potentially beat inflation, help you to create wealth.
Please note that, choose the investment option based on your risk appetite, goals & tenure.
Read & understand related documents carefully before investing.
If you do not know how to go about investing, then please connect with any personal finance expert who can advise you in right way with conflict-free & unbiased approach!
Why ‘Invest’ or ‘reduce the loan burden’ & ‘Not spend’ full Diwali Bonus?
You must be thinking, why I am asking you to ‘Invest’ major portion of your bonus money or pay off the loans to some extent!
Few important reasons-
- This Diwali, we are experiencing high inflation. Inflation last month reached up to 7.4%. We experience this even in daily expenses. This doesn’t allow us to spend on any lifestyle items when we have to spend our monthly expenses by drawing a strict budget!
- Rise in inflation eat purchase power of money. How much ever the inflation is, future goals & required amount to achieve them can’t be compromised. So, invest now.
- If you have ongoing monthly investment like Systematic Investment Plan, then market volatility will give you advantage of rupee cost averaging & compounding. Investing additional amount now can give you long term advantage.
- Interest rates are on the rise. This can increase the loan EMIs in near future. Better to reduce the loan burden to some extent now by paying off using bonus money.
Diwali is a festival of lights which bring prosperity & wisdom!
I wish you all the happiness on this festival!