Around December each year, generally salaried professionals start to worry about their bonus and appraisals. Expectations and anxiety run parallel, until one takes over the other at the date of announcement. Conversations about their end use are usually topics at coffee cups or glass of wine. Well, everyone is not expected to be really happy with their bonus and appraisal. At the end of the day, it is money. Rather than spending haphazardly depending on which emotion was triggered, it will make a lot better sense to sit with your financial advisor and brainstorm at it.

Do you plan to purchase the latest gadget or that new car for which you were waiting since your college days? Or are you planning a vacation abroad?

However, it’s better to clarify that any financial advisor is not against enjoying life to the fullest. At the same time, it makes better sense to stick to the ground financial reality. If there is an existing expensive debt, it is a good idea to settle off that loan rather than buying the latest gadget or a new car.

In this trivia, let’s discuss on how an annual bonus can be spent effectively.

• Outstanding credit card debt

There are several cases where a person has to struggle to settle existing credit card dues in full in February and March since priority is always to make tax-saving investments. Credit card debt is the most expensive debt in the organised finance sector, along with it are it’s close cousins namely, heavy penalty for non-payment and service tax. If a person belongs to this category, this is the time to get their financial health back.

• Expensive loans

Apart from credit card debt,it there is an expensive personal loan, bonus can be used to square off such loan. Such loans will come with prepayment penalty clause. A close assessment is needed to understand the cost of pre-payment before any decision to prepay is taken.

Even if part prepayment of home loan is carried out, it will either bring down Equated Monthly Instalments (EMI) or shorten the loan tenure. Either way, lesser interest on loan will be paid during the term of the loan.

• Life and Health Insurance

Insurance portfolio is equally important to an investment portfolio. However, not many times a second chance is granted to rectify mistakes in an insurance portfolio.

Unfortunately, many of us don’t pay requisite importance to our insurance portfolio. The focus is more on investment portfolio. The irony is that investment angle is predominant even while opting for buying insurance. Traditional life insurance plans and ULIPs are prime examples.

If existing life and health insurance falls short due to a revise in asset allocation or substantial increase in income level, this may just be the right time to get our insurance portfolio in order.

Tax benefits are like cherry on the top of a cake. Premium paid for life and health insurance plans qualifies for tax deduction under Section 80C and Section 80D respectively.

• Emergency fund

Emergency fund is a small amount parked in the form of fixed deposits or several liquid funds. These can be accessed at the time of an unplanned expenditure. Very often, creation of emergency fund is ignored as the inherent understanding is that nothing can go wrong in just 3-6 months. If an emergency fund is not created, it is a good idea to allocate part or entire bonus towards emergency corpus.

At least 3-6 months of monthly expenses should be parked in an emergency fund. An emergency corpus helps you tide over short-term crisis such as loss of job or a medical emergency.

• Tax-saving investments

Procrastination is best at play when the wait of last quarter of financial year to make tax-saving investments.  And that’s where a lot of money is spent in purchasing useless financial products, which are least understood, but just because they are tax saving, that’s enough not to give it a second thought.

This year, try a different approach.Stop procrastinating.

Make or plan all your tax-saving investments in the first quarter itself. Do not wait till the last quarter. Sit with your financial advisor and ask him each and every question about it.

 If there is a plan to invest in tax-saving mutual funds, earmark the funds to start a SIP. For instance, if you intend to invest Rs 60,000 in ELSS during the financial year, you can invest Rs 60,000 lump sum or earmark the funds for SIP of Rs 5,000 per month.

• Build up a corpus for down payment for house or car

This may not apply to everyone. If there has been a plan to purchase a house or a car, part of bonus can be used for making down payment for house or car.

• Portfolio Review

Beginning of the financial year is the right time to review entire portfolio. A structured rebalance can take place on the portfolio if any of investments has outperformed or underperformed.

If there is an expectation to fall short of the amount needed for a goal, bonus can allocated towards that goal.

• Most important of all ~ Enjoy too

As wealth managers, we are often seen with an eye of skepticism. If every penny is invested then there will not be anything left to spend on. Well, let’s change this perspective. It’s extremely important to enjoy and secure your future at the same time. Most important of all, when you decide to party with your bonus money, do include your financial advisor too.

Money is not an end. It is merely a means to an end.Don’t feel guilty to splurge a bit. But yes, exercise some restraint.

Jinay Savla