For those of you who don't have a clear plan, here are some of things that you can do with your Diwali bonus.
It is Diwali and if Goddess Lakshmi has bestowed her blessings on you, there is a good chance that you are or would be sitting on a hefty Diwali bonus in your bank account. While most of us love to see that money in our bank account, we are often a little lost about what to do with it. With no clear strategy on how that money should be used and retailers wooing you everyday with best deals on just about everything, you may often end up splurging on things which perhaps you could have done without.
This realisation may dawn eventually but the damage would have already been done.
So how can one use this once a year opportunity to gain on the financial front rather than splurge it on silly things? The common tendency to treat a bonus is to think of it as a windfall gain and hence view it differently from regular income and savings.
In behavioural finance, this tendency is called mental accounting where you treat money received from different sources differently. The key point to consider is that money is fungible and regardless of its origins or intended use, all money is the same. So if you have some goals you are working towards, your Diwali bonus can be used to speed up these goals.
For those of you who don't have a clear plan, here are some of things that you can do with your Diwali bonus.
The author Aditya Prasad is chief evangelist at Perfios.com
1. Pay off high cost debt
It is not uncommon to see people carrying credit card debt and using any surplus to invest, if not spend. If you are paying 30-36 per cent as interest on your credit card and investing in a fixed deposit or other similar investment, which will earn you 8 per cent, are you not better off by paying off your debt rather than investing?
Paying off high cost debt should be the top most priority if you receive a lumpsum amount.
Given that interest rates are rising, your home loan too may become costlier in future. If there is no other need for the money, you could plan to clear off a part of your home loan by making a prepayment. This will not only reduce the tenure but also amount to a huge savings in the interest outgo.
2. Save for the rainy day
It is prudent to have at least 4-6 months expenses set aside towards any contingency needs. However, people are often not able to do that through their regular savings because of commitments towards EMIs, insurance premiums, SIPs etc.
Or they may take years to build a contingency fund. A lumpsum bonus can be used to create a contingency fund whereby you would have some cushion in case of any eventuality such as loss of job, medical emergency and the like.
3. Buy insurance
Underinsurance or no insurance for life, health and disability is perhaps the most common folly that individuals commit. Life is unpredictable and one can never be prepared enough for what may be in store tomorrow.
People may postpone the decision to buy insurances because committing large amount of money in one shot does not find favour with most. They would rather get the insurances in place over a couple of years.
A bonus payout is a good opportunity to get yourself adequately insured. It is the best gift you can give your family.