Received a bonus?

At the start of a new financial year, employees often receive a bonus income as well as arrears and reimbursements from the previous year. These payments over and above their regular salary come as a morale booster. It’s nice to look at a nice, fat bank balance at the start of April. You may be even tempted to start splurging this money in all the ways you have been dreaming of. But before you do that, stop and think.

TAKE STOCK OF DEBTS
A little extra cash in hand provides the opportunity to take stock of, and reduce, debts. Prioritise the debts you have. The most expensive debts — credit card balance, personal loans — should take priority since their interest rates are the highest. If you have a home loan or car loan, see if you can meaningfully reduce their balances using your bonus income. Reducing your home loan balance, especially, can be very useful. One extra EMI as a principal pre-payment can bring down your loan tenure by several months. Let’s say you borrowed Rs 25 lakh for 20 years at nine per cent starting from January 2018. Your EMI is Rs 22,493. You pre-paid Rs 23,000 in April. This reduces your interest payment from Rs 28.98 lakh to Rs 27.89 lakh, and tenure reduces from 240 months to 235. 

SPEND RESPONSIBLY
The bonus, arrears and reimbursements are your income. As with any income, you have the responsibility of spending these seasonal gains in a responsible manner. This doesn’t mean you only think of the long-term and not allow yourself some cheers after a year of hard work. You can and should do both. Here are some more thoughts on that.

CONTRIBUTE TO MONEY GOALS
Take stock of your various money goals — saving up for a holiday, your retirement, or for next house purchase. The extra income in April allows to make micro-contributions to each of these goals, thus reducing the time you will take to attain them.

TOP UP INSURANCE
The best time to buy insurance is at the start of a financial year. You have time to think through your insurance purchase rather than making hurried decisions at the end of the year. Also, with your bonus, you have cash to buy the right kind of coverage. Think of ways you can improve your cover. Healthcare costs keep going up each year, so it would be prudent to arm yourself with a top-up cover.If you have not purchase life insurance recently, evaluate your life risks and buy an appropriate-sized cover. 

TOP UP YOUR EMERGENCY FUND
Emergencies show up in various forms: loss of employment, damages to property, health problems, urgent travel, and so on. To ensure you have liquidity in such situations, you must create a fund that helps replace your regular income. The size of this fund should ideally be six to 12 months of your current monthly income. Use a recurring deposit or FD to create such a fund. If you have already created it, take stock of it. Use your bonus income to top up the fund to match it with your latest income and lifestyle.

ENJOY THE REST
It’s important to enjoy your income as well. You have now repaid your loans, saved for emergencies, insured yourself, and invested towards your life goals. Now, you must indulge yourself too. You’ve earned it.Buy that electronic item you’ve always wanted or take the vacation you may have longed for.