Received your annual bonus?

6 MinsJune 2, 2022

If you are a salaried employee, by now you must have received your annual bonus. And the sizeable amount credited to your salary account must have made the summer heat a bit more bearable, right? It’s natural to want to splurge the excess money on a cool new gadget or take off on a trip. However, before you spend all of it on what you want, consider what this money can do for you.

6 Ways to Effectively Invest Your Annual Bonus

Additional income can be a great way to clear your credit card dues. You can also use it for tax planning, padding up your emergency fund or investing for your future. Here are six ideas on what you can do with your annual bonus this year:

1. Reduce your debt burden

It’s always a smart idea to pay off your debt when you have a little extra money in the bank. Instead of paying interest, you can save or invest that additional money for the future. You can use your annual bonus to pay off high-interest debt, such as - personal loans, car loans, or credit card dues. Even loans from friends and family should be cleared off as soon as possible. If you have debt for which you can claim tax breaks, evaluate whether continuing with the loan is better than paying it off; if the answer is to reduce the loan burden, pay it off last. Don’t forget to double check on the pre-closure charges to avoid paying a penalty. By paying off your debt, you can ensure that you will have more disposable income in the future to use for your financial needs or for investing.

2. Bolster your emergency fund

Ideally, you should have three to six months’ worth of expenses in an emergency fund. This can come in handy at the time of unforeseen circumstances, such as a job loss or a health crisis that demands money. If you don’t have an emergency fund yet, then your annual bonus or tax refund is the perfect opportunity to build one. Having an emergency fund is one of the pillars of managing your personal finance. If you got the memo early and you already have an emergency fund, you could add more money to it so that your financial needs are covered in the future.

3. Devote it to tax planning

A smart investor does not leave tax planning for the last minute. Ideally, the start of the financial year is when you should start your tax planning-. Instead of scrambling to make tax-saving investments in December or January, use your annual bonus to invest a lump sum amount in an equity-linked savings scheme (ELSS), a tax-saving fixed deposit or any other tax-saving avenue. Investing via an SIP/STP too is a good option.

4. Buy insurance

Insurance is a great way to protect yourself from sudden financial emergencies in the future. If you don’t have life cover or health insurance, use the money from your annual bonus or income tax refund to gift yourself insurance. You could also buy insurance for your dependents. Not only can you use the money paid for insurance to reduce your tax burden, it is also a way to protect you and your family in case the unexpected occurs. For instance, if you meet with an accident or a parent suffers a health crisis, instead of dipping into your savings, you can turn to insurance to meet the expenses.

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5. Invest in your retirement

Have you started long-term financial planning for yourself? If not, it’s time to think about that. When you retire, you will be left at the mercy of what you invest today. Thinking of your children as a retirement safety net is a very poor financial plan to fall back on. There’s so much that could go wrong there. Instead of depending on someone else for your retirement, build a retirement corpus for yourself, as soon as you get the opportunity. Use your annual bonus to buy an annuity plan, invest in a National Pension System account or increase your contribution to your Public Provident Fund. The sooner you start saving towards your retirement, the more you can leverage the power of compounding and make your money work for you.

6. Diversify your investments

If you do not have any debt, have a sufficient emergency fund, and have your tax planning covered, then you can still use your annual bonus to make smart investments. A rupee invested wisely today will be worth a lot more in the future. There are diverse investment options to choose from. You could put the money in equity mutual funds if the market looks favourable. If not, you could always put the money in debt mutual funds and then use a Systematic Transfer Plan (STP) to transfer funds to an equity mutual fund over a period of time. If you have the bandwidth, you could invest a portion of the money directly in shares to diversify your portfolio. Even gold investments in the form of digital gold or sovereign gold bonds (SGB) could be considered. The idea is to invest in an avenue with growth potential as also in areas which help you build a well-diversified portfolio.

It’s okay to use a part of your annual bonus to fulfil some of your wants. However, a smart individual will always use excess money to better plan their finances. That’s what we want to encourage you to do this year. If you can’t think of any good investment avenues right away, put it in a liquid fund to begin with, so that you can invest wisely when the opportunity arises or when sufficient planning is done from your side.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.