Best Ways to Use Your Bonus

PLANNING FOR FUTURE Don’t let the flush of liquidity make you lose sight of your long-term requirements. Here are a few ways to make the most of your payout

It’s that time of the year when your salary account gets a little bit more than usual. You may be tempted to go on that long-awaited vacation or bring home that feature-laden cellphone. But it is important to distinguish between what you need and the things you desire. Here are a few ways to make most of the sudden flush of liquidity.

Prepay costly and long-term loans:
Last week, HDFC hiked its home loan rates by up to 20 basis points. If you have a huge home loan or other outstandings, reducing debt should be your priority when you have extra cash in hand. One can argue in favour of investments that give high returns instead of paying off a low-cost home loan. But being debt free gives the individual freedom from stress and could also improve his credit score.

Buy a single premium term plan:
Many people want to buy insurance but never really get down to doing it. They also don’t have the discipline to continue paying premiums for several years. If this is you, a single-premium term plan may be just the right policy for you. These plans charge a large premium up front, but a one-time payment will take care of all your life insurance needs. A 30-year-old man will pay a one-time premium of Rs 1.57 lakh for a cover of ₹1 crore for 30 years.

Buy health cover for family:
While a growing number of families are acutely aware of the need to have medical insurance, the rest of us often let it slide. Your group insurance policy may not provide sufficient coverage for your family. This is where your bonus comes in. Use it to buy a family floater health plan, which will take care of the hospitalisation expenses of all family members.

Set up an emergency fund:
Preparing yourself for unforeseen circumstances is the cornerstone of financial planning. A contingency fund ensures that you have enough to cover basic living expenses in case of a sudden lay-off or extended illness that prevents you from fulltime employment. You can use your bonus to start your fund, or add to it if you already have one. The thumb rule is to have enough stashed away to cover 3-6 months of expenses, including loan EMIs and insurance premiums.

Start SIPs in equity scheme:
Before the market correction, equity funds were on a roll. Even now, their long-term returns are quite impressive. If you are willing to take some risks and have enough patience, equity funds can give you good returns. But don’t rush to invest in this overheated market. Stash the amount in a liquid fund, and then start a systematic transfer plan into an equity fund. SIPs will cushion you against market volatility while the liquid fund will earn more than a regular savings bank account.

Invest for your child’s education:
Education expenses are rising at over 10% a year. Last week, IIM Ahmedabad hiked the fee of its twoyear management course to ₹21 lakh. IIM fees has risen 500% since 2007. Imagine how much it will be when your child is ready to go to college. If your child is in school, allocate some portion of your bonus to an education fund for your child.

Invest in FDs through parents:
Returns from fixed deposits are unimpressive and the interest is fully taxable. However, though FDs are not viable for you, use them to invest through your parents. You can gift money to your parents and then get them to invest in high-yield fixed deposits. If they don’t already have a very high interest income, the amount earned will not be taxed due to the additional ₹50,000 tax exemption to interest for senior citizens from this financial year.

Put money in the NPS:
Invest a part of your bonus in the National Pension System (NPS) to save tax. Under the new Section 80CCD (1b), up to ₹50,000 invested in the scheme is eligible for deduction. This is over and above the ₹1.5 lakh investment limit under Section 80C. But NPS has very low liquidity. You can withdraw only when you retire at 60. Premature withdrawals are allowed only in very exceptional circumstances. Even at maturity, it is mandatory to buy an annuity with 40% of the corpus.

Make your home energy efficient:
It might not seem like a priority now, but investing in certain energy efficiency measures for your home can save you a fortune in electricity bills over the long term. Harness solar energy by installing solar panels on your rooftop or balcony, CFLs and LEDs which consume 25-80% less electricity, paint the roof and outer walls with reflective paint and use double and triple glazed window panes for insulation. An energy-efficient home is a gift that keeps on giving.