By now, your organization must have handed out the bonus and increment. If you are one of the few lucky people to receive an increment and bonus or at least one of the two, it is crucial that you use it wisely and don’t squander it. Planning your increment and bonus money can help you achieve your financial goals and be debt free. You may have got a single digit percentage hike or double digit, the percentage of your hike is not of much significance. The essential part is that you plan your finances according to your bonus and salary hike. There is no wrong in splurging once in a while, but planning for it will help you avoid burning a hole in your pocket or regretting about your decision later. Choosing the right way to handle your bonus and increment is comfortable with these simple steps.
Build an emergency fund
If you haven’t yet built an emergency fund, now it’s the right time to do so. It is recommended that you keep at least three months’ worth of expenses in your emergency fund. The emergency fund can help you tide over any unfortunate scenarios such as job loss or minor accidents. You can use your bonus to create an emergency fund. It is essential to have funds earmarked for emergencies as with emergency fund in place; you will not be tempted to dip into your long-term investments.
While building an emergency fund, it is essential to park it in a product with the highest liquidity. Savings account and the liquid fund have the highest liquidity and individuals can redeem money within minutes. You can keep one-third of the emergency fund in a savings account for easy access and the rest in a liquid fund. Liquid fund is a category of debt mutual fund with the lowest risk. Also, liquid funds give a higher rate of returns than savings accounts.
Start Investing or Increase your SIP amount
If you always waited for the right time to start investing or have enough money to start investing, this is the right time for you. If you don’t have the technical knowledge of investing directly in stocks, mutual funds (MFs) would be the best option for you. There are different types and categories of mutual funds to suit and cater to the various kinds of investors. No matter how many days or years you want to invest, what kind of risk-taking capability you have, there is at least one mutual fund for you.
Typically, before investing, you need to list your financial goals and time horizon. Your financial advisor can help you through this investment journey. You can invest the bonus amount as a lump sum investment, and you can set up a systematic investment plan (SIP) with your monthly increment. It is advisable that at least 20 per cent of your take home salary should be invested.
If you already have SIPs running, you can step up your SIP as per your increment percentage. Stepping up your SIP amount regularly can help you reach your financial goals faster. If you invested Rs5,000 per month for ten years at a 12 per cent rate of return, your corpus at the end of the ten years would be Rs11.6 lakh. On the other hand, if you had increased your SIP by 10 per cent per year, your corpus would be grown to Rs15.36 lakh.
You can also invest your bonus in that fund. You can segregate the bonus equally between the different funds, or you can invest in a financial goal that you want to achieve at the earliest.
Lessen your debt obligations
No one likes to live debt, especially when the loan attracts a high-interest rate. If you are in a journey to cut your debts, repaying your loans with your bonus can be a move in the right direction. You can start by paying off your credit card debts and personal loans as it carries a high interest rate and gives you no tax benefit. Once you pay off these debt obligations, you can move to the vehicle and home loans. You can also invest a portion of your increment towards repaying of the loan. However, before you do that, it is vital to check the prepayment charges as many banks charge prepayment charges for foreclosing the loans. To summaries, knowing how to maximize your increment and bonus can go a long way in helping you achieve your financial goals. Thanks to technology, various facilities such as step up SIP among others can automatically increase your SIP amount every year by a certain predetermined percentage. Use your increment and bonus wisely so that your future you will thank you.
The author is head and founder of Mumbai-based financial advisory firm Money Mantra. He can be reached at email@example.com