6 MinsJune 11, 2021
It’s that time of the year when most companies would have paid out the annual bonuses or increments. But given the economic uncertainty on account of the COVID-19 Pandemic, this year, it is possible that many salaried employees got a lower
than expected bonus or perhaps none at all. According to the Centre for Monitoring Indian Economy (CMIE) data, around 72.2 lakh people have lost their jobs in April 2021 and several salaried people are vulnerable to losing their jobs going
forward. so, if you have a job in hand, received an increment and/or annual bonus, don’t rush to spend it. Given the prevailing uncertainty, use the extra money as a cushion for your future.
Here’s what you should do:
Invest based on a thorough need-based analysis
When you invest, identify the financial goals and position your portfolio in line with those goals. Your asset allocation, i.e. how much to invest in which asset, should be based on your age, income and expense, assets and liabilities, risk appetite,
your investment objective, your financial goal, and the time to achieve the goal. Don’t invest in an ad-hoc manner or simply chase returns.
For instance, if your risk profile is high, the investment objective is capital appreciation (over the long-term), and the time to achieve the goals is more than 3 years, you may consider investing in an equity-oriented mutual fund. Conversely,
if your risk profile is low, wish to earn stable returns by preserving capital, and if the time for the goal is 3 years or less, you may consider debt-oriented mutual funds.
When deciding how much to invest for the goal, calculate the future value of the goal after three aspects: i) the cost associated to achieve the respective goal in today’s terms, ii) the inflation rate, and iii) the time-to-goal.
Increase your investment and be disciplined
To accomplish the envisioned financial goals, it is also important to be disciplined and persistent with your investment. You can ensure this by investing via Systematic Investment Plans (SIPs).
A SIP allows you to invest in small amounts, at regular intervals, helps reduce the impact of market volatility through rupee cost-averaging and makes timing the market irrelevant.
Ideally, if you make your payday the SIP day and then
spend what is left after saving and investing, it can go a long way in helping you achieve your goals. Today, many fund houses allow choosing a specific SIP instalment date besides the usual practice of selecting default dates, i.e. 7th, 10th,
15th, or 20th of every month on the application form for monthly SIP instalments.
You can also step up your SIP instalment to match your annual bonus. This will help you counter inflation better, add up to the power of compounding, and help accomplish the envisioned financial goals faster.
There are two ways you can do this:
1) By a fixed rupee basis each year. So, say you have a monthly SIP of Rs 10,000, you can increase this amount every year by Rs 1,000 or Rs 2,000 as per your requirement; or
2) By a fixed percentage basis each year, say by adding 10%-20%, to your current monthly SIP year-after-year.
Certain mutual funds allow investors to automate the step-up SIPs (also known as top-up SIPs), while for others you need to provide a manual request via mandate.
[Also Read: 5 Things to Know About SIPs]
At a glance
- Invest your bonus in a combination of equity and fixed income instruments
- Select the investment based on your risk profile, investment objective, financial goal and time required for the goal
- Increase regular investments such as SIPs to match the increase in your salary
- Set aside an emergency fund, which is about 6 months of regular expenses, including EMIs
- Pay off outstanding loans either partly or in full and reduce your debt burden
Boost your contingency fund
You can also use your bonus to plan for a rainy day, by setting aside an adequate contingency fund (also known as an emergency fund or a rainy day fund). Ensure you are holding at least 6 to 18 months of regular monthly expenses (including EMIs)
as your contingency fund in a separate Savings Bank Account or an Overnight Fund/Liquid Fund. This fund should be utilised only if you face unexpected expenses that you have not allocated money
for. If you already have some money set aside, utilise the bonus you earned to bring it to the level required for your emergency fund.
Pay off or reduce your debt burden
If you have outstanding loans, pay off or reduce your debt burden with the bonus you earned. Utilise the bonus earned to prepay your loans – partially or in full. By doing this you will save a lot on interest payment. Besides, the money
you save on loan repayment can be invested for your future needs.
Handle your money prudently so that it can help you achieve financial wellbeing and ensure financial freedom.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN 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