8 Ways to Use Your Diwali Bonus

With a Diwali bonus in your bank account, you might have already prepared your shopping list. However, before you swipe your card or click on ‘buy’ button, it is essential to create a plan for this windfall gain so that it doesn’t disappear much before you realise it. In short, you need to be a hard-nosed shopper.

As said by Warren Buffet, “If you buy things you do not need, soon you will have to sell things you need.”

Financial discipline is what you need during this time and to help you with that, here are some useful ways in which you can use your Diwali bonus=

1. Indulge in shopping: It may not be what you were expecting to read here, but it is very important to reward yourself. Also, as per a well-documented behavioural phenomenon, known as ‘mental accounting,’ people treat money differently on the basis of their sources. For instance, people become inconsiderate in spending ‘found’ money, like tax refunds, windfall gains, bonus, and gifts, as compared to their monthly salaries. To curb this urge, you can spend 10% of the bonus on yourself and your family. This will ensure that the remaining 90% will be there for investment.

2. Pay off debts= You can’t grow your money when you owe money. So, start repaying your debt in order of interest rates. The ones with no tax incentive and high-interest rate should go first. These could include credit card bills, personal loan, vehicle loan, etc. Last would be the ones that offer tax benefits, like education loan, home loan, etc.

3. Increase your equity exposure via SIP investment= It is the time to start investing in equities and make the best use of the market. As the stock market graph is never a straight line, invest via SIP to grow your money. By choosing SIP investment, you can invest regularly in small portions without ‘timing’ your entry in the market and fret over the prevailing market conditions.

Further, SIP investment works on the Principle of Rupee Cost Averaging or RCA. With SIP investment, you invest regularly and fetch more units when the prices are low and less number of units when the prices increase. Through, regular investment, you can lower the average cost of the financial asset over a long run.

Then, the power of compounding can snowball the returns over the long run. By investing your money for a longer duration, you can fetch high returns which you can later use to repay your loan and lower your loan burden.

4. Buy term insurance: The uncertainty of life is the most certain thing about it. The festival is all about family time, and therefore, this is the best time to secure the well-being of your family with a term insurance which would financially secure your family in your absence. Buying it when you are young makes more sense as it would translate into lower premiums. A 30-year old would need to pay only Rs 9,000 approximately to get Rs 1 crore cover. Besides offering death benefits, there are various term insurance plans which offer coverage against critical illness and disability also.

5. Do some charity= There is nothing more beautiful than being able to bring a smile on someone’s face. Giving away a part of your bonus as a donation to the needy is a great idea. Further, your good deeds can also give tax benefits to you asdonations to some of the specific charitable organisations get tax benefits under provisions of the Income Tax Act.

6. Create an emergency fund= You can put your money to good use by building an emergency fund or adding to your fund if you already have one. Ideally, a minimum of 3-months expenditure should be kept in an emergency fund, however, you can keep aside 6-month’s expenses as well, considering the spiralling inflation rate. Instead of putting your money in a savings account, invest your funds in liquid funds which give better returns than the former.

7. Use funds to invest in tax-saving financial instruments: Now, when only a few months have remained in the current financial year, it is the time to do your tax planning if you haven’t done yet. You can use salary bonus to buy various tax-saving financial instruments if you haven’t purchased.

8. Get a health insurance policy: Many of us are reluctant to purchase health insurance, especially if we are covered under the corporate insurance policy. Considering the exorbitant healthcare costs, health cover is an absolute must-have and under no circumstances should you take the risk of going without it even for a day. Moreover, a corporate health cover ceases to exist once you leave the job.A family floaterhealth insurance policy, can cost anywhere between Rs 8,000 and Rs 10,000 for a health cover of Rs 5 lakh. A Diwali bonus an excellent opportunity to secure the health of your family.

Here, while planning, what is important is that you keep your head above water. For that, it is essential to maintain a perfect equilibrium between things which give immediate gratification and things which are imperative to bolster your financial life in a long run.

Usually, festive bonuses are considered as an additional bonanza and treated differently from the regular income. In behavioural finance, money is fungible and therefore, irrespective of its origins, all money should be considered as same.