If you are the one receiving an annual bonus amid the ongoing economic strife, count your blessings. A bonus brings you great joy but does not obligate you to squander it by purchasing a flashy gadget or spending it on unnecessary home improvements. If you’re struggling to figure out how to spend your bonus wisely to make the most of it, this article is for you. Here are seven smart ways to use your annual bonus to make the coming years more financially secure.
Smart Ways to Use Your Annual Bonus:
1. Upgrade Your Emergency Fund
In times of chaos, your emergency fund serves as an oxygen mask. It helps you weather the economic storm caused by a job loss, salary cut, and unexpected expenses such as a car repair or a medical emergency. One of the smart ways to use your annual bonus is to ramp up your emergency fund to keep up with your age and the nature of your job.
Your vulnerability increases if you work in a riskier job that is hit first during a recession or economic crisis. So, one of the smart ways to use your annual bonus is to invest in illiquid and low-risk investments without lock-in periods so that you can access the funds quickly when needed.
Most financial experts recommend building up an emergency fund to the tune of your three to six months’ salary to give you a financial cushion. To stay guarded, you can cushion up to meet six to nine months’ expenses if you fall in the vulnerable job bracket. As the pandemic taught us that you never know how long a financial crisis will last, so it’s always a great idea to buffer your emergency funds.
Boosting your emergency funds to save for a rainy day is one of the smart ways to use your annual bonus. This relieves you of the mental stress of managing unplanned expenses such as home or car repairs and planned expenses such as paying your child’s fee, managing household expenses, or paying your EMI on time.
2. Use Your Annual Bonus To Pay Off Your Debts
Never carry debts too large to service, whether you have a credit card, a home, a car, or any other type of consumer loan. When looking for smart ways to use your annual bonus, making advance payments in lump sums is a good overarching rule to follow. Whatever your loan balance or interest rate, the longer the repayment period, the more expensive your loan.
Before dozing off, hear me out loud. Let’s see how much extra money you can save by making a lump sum payment on your loan. But first, gear up for the benefits of making loan prepayments-
- Any prepayment goes directly into your loan principal and not your interest
- Helps to consolidate your loans as it allows you to shift your focus from high-interest loans like Personal Loans to low-interest loans like Housing loans.
- Helps you in saving a great deal of money in interest.
Say you availed a home loan of Rs. 30 Lacs for 20 years. After making regular payments for 5 years, you chose loan prepayment as one of the smart ways to use your annual bonus.
|Home Loan availed||Rs. 30 Lacs|
|Interest Rate applied||9%|
|Total Interest Payable||Rs. 34,78,027/-|
|Total Payment (Principal + Interest)||Rs. 64,78,027/-|
|Prepayment Amount||Rs. 2 Lacs|
|Loan Outstanding (5th Year)||Rs. 26,81,997/-|
|Loan Outstanding (After Prepayment)||Rs. 24,81,997/-|
|Interest Savings||Rs. 4,99,984/-|
|Savings in Loan tenure||25 months|
3. Use Your Annual Bonus To Get Adequate Insurance Cover
Obtaining adequate insurance coverage is another smart way to use your annual bonus. It is your responsibility as a breadwinner to provide financial security for your family; you must not ignore this. We frequently overlook the importance of adequate life insurance, either due to a lack of proper knowledge or misplaced information.
According to financial experts, adequate life insurance should cover current obligations and your family’s future needs without affecting their lifestyle. To determine the appropriate level of life insurance for you, multiply your current income by ten. If your current annual income is Rs. 12 lacs, your life cover must be at least Rs. 1.2 crores. Anything less is considered inadequate insurance.
Another reason to consider revamping your insurance as one of the smart ways to use your annual bonus is that most of us obtain life insurance at the start of our careers. With changing family responsibilities, income, expenses, and financial obligations, reviewing your insurance coverage is never too late. Reevaluate your financial goals and, if necessary, invest in additional coverage to achieve financial freedom.
4. Use Your Annual Bonus To Build Your Retirement Savings
Investing in your retirement savings should be high on your list of smart ways to use your bonus. Increasing your retirement corpus can help you become self-sufficient and gain more control over your life. What if you don’t see yourself ever wanting to stop working? It’s always a good idea to plan for a day when you won’t be able to work.
So, if you haven’t already, adding a comfortable nest egg to your bucket list of smart ways to use your annual bonus is a must. This is also necessary because rising inflation raises the risk of running out of money after retirement. So, continue to make catch-up contributions to your retirement savings to absorb the effects of inflation. In addition, investing in long-term equity instruments -like mutual funds or fundamentally strong shares- helps build a hefty corpus and delivers returns that beat inflation.
5. Use Your Annual Bonus To Save For Your Future Goals
Remember when your parents gave you a bonus as a reward for doing an extra job when you were a kid? Even as adults, the thrill of receiving a bonus remains the same. Rather than getting swayed by impulsive purchases, invest at least 30% of your bonus to achieve your long-term objectives. If you are not good at making investment decisions, invest in long-term mutual funds in various sectors, geographies, assets, or strategies.
You can put all or part of your year-end blessings into long-term investment vehicles to get closer to your financial goals, such as saving for your child’s higher education or marriage.
We spoke of the 5 Ways to use your annual bonus. Here are two bonus tips to know
6. Use Your Annual Bonus To Buy A Family Health Cover
The pandemic was a watershed moment in the healthcare industry, causing a significant increase in various medical costs such as hospitalization, medications, ventilators, oxygen cylinders, and so on. With the current medical inflation rate at 14%, meeting medical expenses has become even more difficult. As a result, investing in health insurance is one of the smart ways to use your annual bonus.
Though there is no fixed rule to asses adequate health insurance coverage, per the broadly accepted rules in the market, your health insurance coverage must be between 50% – 100% of your annual income. Let’s assume your annual income is Rs. 12 lacs and your last three years’ hospitalization expenses as Rs. 5 lacs; then a decent health cover may be calculated as-
50% of your annual income (i.e. Rs. 6 lacs) + 100% of the last 3 years’ hospitalization expenses (i.e. Rs. 5 lacs) will be Rs. 11 Lacs health cover.
If you don’t want your medical expenses topping off your savings, invest a portion of your bonus in family floater health insurance, which provides medical security for you and your loved ones. It also entitles you to claim tax rebates up to Rs. 20,000/- (up to Rs. 30,000/- if availed for senior citizens) under section 80C. This sums up why availing of health insurance fits the list of smart ways to use your annual bonus.
7. Use Your Annual Bonus To Travel
Your bonus is a reward for your efforts throughout the year. Once you’ve met your savings goals, consider paying off a portion of a high-interest loan, and then consider an enjoyable getaway as one of the smart ways to use your bonus. You may take the occasion to applaud yourself for the hours of hard work you put in and go on a small fun outing with your loved ones. Spending time with your family provides incredible happiness returns and should not be underestimated.
One of the smart ways to use your bonus is to set aside a portion of it for a rejuvenating vacation. Early vacation planning can result in fantastic savings on flights, hotels, rental cars, etc. Using cash is preferable to taking out a credit card loan, which can take months to repay.
A bonus is similar to a tiny windfall that must be wisely invested to be enjoyed at some point in the future. With so many smart ways to use your annual bonus, make a deliberate decision that provides the overall benefit of future security, less financial burden, and rejuvenation. The best part is that you can choose one or combine options to suit your family’s needs.
Is a bonus on salary taxable? In which year is the bonus taxed?
The bonus is, indeed, taxable. You must pay tax for the tax year in which it is declared by your employer. For example, assume your company announced an Rs. 15,000/- bonus on March 10, 2023, but you received it on April 15, 2023. Your bonus amount will be deemed payable within FY 2022-23, and you must pay the tax in the same year.
How will my tax liability be calculated if my taxable income increases after receiving the bonus and moves to a higher tax bracket?
If your net taxable income increases due to the bonus, your TDS deduction will be calculated using the higher tax slab rates. In such cases, investing in ELSS, life and health insurance, and PF can be smart ways to use your bonus and reduce your tax burden.