Pay Off Your Debt
Even if you are comfortable servicing your debt, it will wise to pay off your high-interest loan. If you have a personal loan where interest rates are generally around 14 to 18 per cent per annum or a credit card loan where the rate of interest can be 24 per cent or even higher, it would make sense that you clear it using your bonus. On a credit card loan of Rs 1 lakh you will pay Rs 24,000 as interest over a one-year period. So by prepaying it you can actually make some savings. However, don’t forget to check about the prepayment penalties while repaying your loans.
Where you can invest your bonus depends on how much risk you can take, plus tenure of you investment. “Based on whether your needs are short-term or long-term and your risk-tolerance level, you need to determine the asset allocation,” says Surya Bhatia, a certified financial planner. If you would need the money in 2-3 years, you look at investing in debt instruments as investing in equity for short-term can be dangerous. However, if you would need the money after five years or more, you can invest the amount in equity mutual funds though systematic investment plans. You can put the money into a debt fund and choose a systematic transfer plan to transfer the money into an equity fund on a monthly basis to avoid the risk of timing the market.
Add to Your Emergency Funds
Most of the people undermine the need of an emergency fund. But having an emergency fund is important for good financial health as you don’t have to liquidate you investments or savings in case you are faced with a situation like medical emergency or a sudden job loss. “If somebody has ageing relatives, or have an ill relative in the family, emergency fund become all the more important,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories, a wealth advisory firm.
If you already have an emergency fund, you should revisit it to check if it is sufficient or not. Although there is no thumb-rule but ideally one should keep an amount equivalent to 6-12 months of expenses in an emergency fund.
Increase Your Insurance Cover
You can utilise the bonus to increase your insurance cover both life as well as health. As far as life insurance is concerned you should review it periodically to enhance it if required. Your life insurance cover should be enough to take care of all your liabilities and the need of your family after you.
Top-Up Health Cover
If you don’t have a health insurance of your own and are relying on the one provided by your employer, it is good idea to use the bonus amount to buy a separate health cover as in case you are between jobs, you will be uninsured for a certain period and won’t get the claim during that period. You can also opt for a top-up health insurance cover if you already have a health insurance cover.
Top-up health cover is an additional cover that you can take on your existing policy. A top-up cover can only be utilised, if you have exhausted the limit of your original policy. It is a cheaper way of increasing your health cover.