Set-up emergency fund
It may sound shocking, but the best way to use your bonus is not to spend it. Use it to build a contingency fund to make sure you have enough to cover basic living expenses in case of a job loss or prolonged illness. Put your bonus in this emergency fund, or add to it if you already have one. The rule of thumb is to deposit enough amount to cover expenses for 3-6 months including loan EMI and insurance premium. However, it depends on factors such as the number of earning members in the household and whether you have health insurance.
Start Sip in Equity Scheme
The markets are on a roll. If you are willing to take some risk and have enough patience, equity funds can give you good returns. But don’t be in a hurry to invest in this hot market. Deposit the amount in a liquid fund, and then initiate a systematic transfer plan to an equity fund. This strategy has dual benefits. one, your sip Investing in equity funds will protect you from market volatility. Second, the amount will be taken out of your bank so you don’t blow it. Liquid funds will also give you slightly better returns than your bank account.
prepayment expensive debt
As a rule, you should use windfall profits to reduce outstanding debts. Prioritize your loans based on the interest you are paying. Credit card debt should be at the top of your list, followed by personal loans, which can charge anywhere between 12-18% interest. However, check whether the lender charges a fee for prepayment of the loan. Consider paying off smaller loans in full, such as your car loan, so you can take them off the list. Lastly, there should be low-cost loans that come with tax benefits, such as home loans or education loans.
Invest for your child’s education
Education is a major expense to be incurred by a parent, and it is growing at the rate of more than 10% annually. MBA fees have increased by 400% since 2011. Imagine how much it will be when your child is ready to go to college. If your child is in school, you should already have a college fund set aside for that. Starting early means a smaller outflow, as you have a longer investment horizon. But if you have not started yet, it is a good idea to allocate your bonus lump sum in this fund. Invest equally in both debt and equity or choose balanced funds to get the ideal asset mix.
Purchase Insurance the cover
Life insurance is essential because life is so unpredictable. Use your bonus to buy a term plan for yourself. Term plans are very cheap when bought at a young age. A 30 year old person would pay only Rs 10,000-12,000 per annum for a cover of Rs 1 crore for 30 years. A 40 year old person would pay around Rs 18,000-20,000 per year for the same cover for 20 years. If you do not want recurring payments, choose a single premium term plan. These plans charge a higher premium than before, but do not require renewal. The lump sum payment covers all your life insurance needs.
Buy health cover for family
The pandemic has made many people realize the importance of health insurance. Still, many people are completely dependent on the group insurance cover they get from their employer. Group covers may not provide adequate coverage. This is where your bonus can come in handy. Buy a family floater health plan to cover all the family members. A floater plan of Rs 10 lakh covering a husband, wife and two children will cost around Rs 20,000-25,000 per annum. But health insurance premiums are eligible for tax deduction, so the effective cost would be Rs 14,000-17,500 in the 30% tax bracket.
invest money in nps
Want to save tax? Invest a part of your bonus in NPS. Under section 80CCD (1b), up to Rs 50,000 invested in the scheme are eligible for deduction. This is over and above the investment limit of Rs 1.5 lakh under section 80C. However, there are a few things to keep in mind before investing. NPS has a very long lock-in period, and the money can be withdrawn only when you retire. But long lock-in also ensures disciplined investment over the long term. Investing in NPS makes sense if you have a lot of taxes and want to reduce it.