We all have performed really well and now its time to get Incentives. That blessed time of the year when our salary account gets a little bit more than usual, and we get a chance to earn some surplus. But while the temptation to go on that long-awaited vacation or bring home that iPhone can be extremely strong, remember that one bout of frivolous spending is all it takes to make the money disappear from our account as quickly as it appeared.
This is not to say that we shouldn’t treat yourself to a trip or a shopping spree. There’s no sense in earning a bonus if we don’t enjoy using it. But moderation is key, and it’s important to distinguish between what we need and the things you desire.
There are many ways to put bonus, or at least part of it to work, depending on time horizon, risk appetite and tax bracket. Carefully evaluate our financial situation to figure out which aspect needs a little help. If till date, you haven’t started saving for our child’s education, bonus can give you a head start. If your family doesn’t have adequate health insurance, use our bonus to buy a family floater.
But it’s not easy to juggle multiple financial goals and figure out where to put your extra cash. Read on to find out the best ways to make the most of our bonus.
Prepay costly and long-term loans
Home loan rates are on the rise. Use the cash to reduce debts.
Doing away with debt should be our priority when we have a little 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.
Prioritize loans based on the interest which is being paid . Credit card debt should top on the list, followed by personal loans, which can charge anywhere between 10-22% interest. However, do check if the lender slaps charges for prepayment of the loan.
Consider paying off smaller loans, like your car loan, in their entirety, so that we can tick them off the list. The last to go should be loans that give tax benefits, like a home loan or education loan.
2. Buy a single premium term plan
A one-time payment will take care of your life insurance till you are 60.
Are we among the millions of Indians who buy life insurance and then let it lapse by missing the premium deadline? A single-premium term plan may be just the right policy for you. These plans charge a large premium up front, but suit those who either lack financial discipline or may not be in a position to pay the annual premium later on.
However, single-premium policies have higher charges. A 30-year-old man will pay Rs 1.57 lakh for a cover of Rs 1 crore for 30 years. If he went for the regular premium option, he would have paid barely Rs.9,000 a year for the same cover. A simple calculation shows that if the buyer puts Rs.1.57 lakh into a bank deposit earning 7%, he will receive Rs.11,000 in interest every year, which will be enough to take care of the premium payment. So, the single-premium option is not very cost effective. ..
But in a regular premium policy, missing a premium leads to the policy lapsing. You might have to shell out a higher premium when you buy afresh. On the other hand, a single premium plan does not require renewal. A one-time payment will take care of all your life insurance needs till you are 60-65 years old.
3. Buy health cover for family
Secure your family’s well being if you don’t already have health cover.
While a growing number of families are acutely aware of the need to have medical insurance, the rest of us often let it slide. The group insurance policy may not provide sufficient coverage for entire family. This is where our bonus comes in. Use it to buy a family floater health plan, which will take care of the hospitalization expenses of all family members.
Family health insurance packages are more suitable for young nuclear families. A new member can be added quite easily by paying the extra premium, instead of going through the process of getting a new standalone policy for the individual.
An individual health plan for 30-year old costs around Rs.11,750 a year, whereas a floater plan that covers both husband and wife costs only Rs.17,624 a year. Similarly, a floater plan for a family of four (two adults under 40 and two kids) would cost Rs. 25,204 a year.
But keep in mind that the coverage of a floater plan is shared between the members. If one member makes a claim during a year, the cover is reduced by that sum and the rest of the members only have the remaining amount to fall back on.
Cost of health insurance cover of Rs 10lakhs
Here’s how much you have to shell out as premium each year for a health cover.
4. Set up an emergency fund
It can help you tide over tough times.
Preparing yourself for unforeseen circumstances is the cornerstone of financial planning. A contingency fund ensures that we have enough to cover basic living expenses in case of a sudden lay-off or extended illness that prevents we from full-time employment. We can use bonus to start fund, or add to it if we 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. However, this varies depending on factors like the number of earning members in the household, whether or not we have health insurance, etc
An emergency fund can also help us manage sudden and unexpected expenses, without dipping into our savings or taking a loan. Credit cards can also serve the same purpose, but their overuse can lead to other complications. Unless credit card outstandings are cleared by the due date, a contingency fund might be a better option. Park your money in an instrument that allows easy access and liquidity.
While bank accounts and fixed deposits can work, a liquid fund or short-term debt fund is ideal for this purpose since they provide both liquidity and higher returns. A liquid fund can be opened in any mutual fund house.
5. 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 we 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 balanced or aggressive fund, and then start a systematic transfer plan into an equity fund. This strategy has twin benefits.
One, your SIP investments in the equity fund will cushion you against market volatility. Stagger your investment over a longer period and gain the rupee cost averaging advantage.
Two, the amount will be out of your savings bank account so you will not end up blowing it away.
Blog by Rajiv Dave, Financial Advisor.
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