How to make the most of your annual bonus income

After a no-show for the past two years, Rishi is expecting an annual bonus this year. He looks forward to it, even if he hasn’t decided what he wants to do with it yet. In the past, he has seen significant non-current income being spent, without showing anything for it. This time around, especially after the lessons of the pandemic, he wants to make sure he’s doing something constructive with the money. He plans to prepay some of the loans he is managing with great difficulty, while his friend suggests that he invest some of the money. Rishi has a savings and investment plan, which he has generally been able to join. He has saved up to buy the latest model of his dream car, which he feels he deserves. He would like advice on how to allocate his bonus money among all these things he has been considering.

Rishi must wonder if this money was taken into account when he made his budget and savings plan. If he had, he should just stick to the plan and not consider the bonus money as an extra. If this is unexpected extra income, then he needs to weigh his options and decide what he wants to do. While he is making his decision, it will be a good idea to transfer the money to a liquid fund, so that it is not spent haphazardly.

Paying off an expensive loan early will help him save on interest charges and free up his regular income from EMI obligations. However, before considering prepaying any part of the home loan, he should consider removing credit cards and personal loans that carry a higher interest rate. If he finds his current job risky and the pandemic isn’t over yet, he might like to keep his loans low.

Rishi should use part of his bonus to catch up on his investment plan, in case he backslid. Since he showed discipline in making his planned investments, it would be a great motivation if the money helped him achieve a goal he was looking forward to. Using the money to accelerate a goal for which savings are already being made is a good idea and acts as a reward. But using it to initiate the purchase of a car with a loan will only increase his monthly expenses with the additional EMIs, which should be avoided.

When making a decision, he should simply consider whether the allowances he is considering would have a positive impact on his financial situation. The result should be something he can identify as the result of the bonus he earned. This will help him make the distribution he likes.

(Content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)


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