Make the most of your year-end bonus

Riken Mehta
Wednesday, 2 May 2018

It’s that time of the year when most of us have received our annual bonus. Instead of simply splurging all of it, here’s how you can spend it constructively.

Rima, a professional with an FMCG company recently received her appraisal letter for all the hard work she had put in in the past year. She had strived hard to close numerous deals the entire year and now her performance bonus was the company’s way of showing its appreciation towards her efforts. Although elated by the lump sum she received, Rima didn’t plan her expenses and thus within two months she had utilised her entire bonus amount in irrelevant, but expensive purchases. Her year-round hard work had paid off, but she finally ended up with paltry gains.

Before we discuss what she could’ve done with this unplanned inflow of money, let’s take a look at what she shouldn’t have done with her performance bonus...

Don’t count your chickens before they hatch
One of the most common mistakes is to start dreaming about buying goods based on pre-tax bonus amount. Remember, your bonus amount is fully taxable, so the next time your manager informs you about your year-end bonus, settle down from the euphoria, take a calculator and gauge your post-tax bonus income and only then start planning it. Another cardinal sin is to assume the same bonus amount for next year as well and plan for some bigger purchases in the coming days. 

Reckless spending or expensive travel plans
Non-essential purchases like the latest smartphone/digital camera/tablet will put a huge dent in your bonus income. Splurging on clothes or planning for a grand holiday trip, which you otherwise would have delayed, should be avoided. Wait for the bonus amount to be credited before you buy anything or book tickets.  

Ways to use your bonus
Move your bonus amount in flexi-fixed deposit or liquid funds.
If you don’t have a well chalked-out financial plan on how to use your bonus income, the immediate best thing to do is to move it from salary account to flexi-fixed deposits or liquid funds. With no plan in place and looking at higher-than-usual balance in salary account will compel you to spend sooner than later. In contrast, flexi-fixed deposits and liquid funds will earn you 6-8 per cent interest per annum before you start spending it on right things as per your new financial plan.

Lighten your load
The reward from your hard work can be put to maximum effect by paying lump sum amount to repay your existing loan. Before you spend your extra money, it will be wise to reduce debt which will further help in the overall savings from the reduction in interest cost. If buying a house or saving up for your children’s education, plan your financial goals, then you must allocate bonus money to these goals so that you can achieve them well in advance.

If your contingency fund is in place for the next six months, then it will be a good practice to bump it up by another 10 per cent. If you don’t have a contingency fund, then create one immediately and allocate the amount equivalent to your six months’ expenses to it. One can also put the money towards their retirement goals by investing in tax-saving instruments like Public Provident Fund or National Pension Scheme. Investments in Systematic Investment Plan (SIP) can also be increased if it suits your risk profile.

Invest in yourself 
In the entire scheme of things, we tend to forget ourselves and don’t even feel the need to remotely invest in ourselves. Invest in yourself using bonus amount to add more skills by taking up a course or buying online tutorials to learn new skills. Such skills can give you an edge over other competitors in the years to come.

A healthy life can make you wealthy too. Take a gym membership, yoga classes or a fitness magazine subscription from your bonus amount to keep yourself healthy.  Once all the above-mentioned aspects of finances are taken care of, and if you still have bonus amount left over, plan for a holiday trip or go shopping. You deserve it!

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