What to do with your annual bonus and increment?

   It's that time of the year when many employees get their annual increments and bonuses. Most individuals look forward to the pay hike and performance bonus. A lump-sum amount is always welcome, because there are many things on the shopping list and to splurge on: LED TV, new music system, annual vacation…

   But financial experts frown upon the tendency to give in to the temptations and blow up the money on non-essential items. They would instead like you to revisit your financial plan and see if the windfall can help you expedite the process of achieving some of the goals. Or, better still, clear any liabilities that may be weighing on your portfolio.

   "The best approach is to plan in advance what to do with the bonus," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. "After all, most people know in the beginning of the year itself that they can expect a bonus."

   Financial planners advise that such a windfall be used judiciously. Some of their suggestions are given below. But do bear in mind that their suitability depends on a host of factors such as an an individual's needs, goals and financial situation.

CREDIT CARD DEBT

   Financial experts emphasise that credit card debt is the most expensive form of credit, with interest ranging between 39% and 45% per annum, and should be cleared at the earliest. Ideally, you should settle all your credit card bills within the interest-free period. Accumulated credit card debt can ruin your financial plans. If you have a huge outstanding on your card, clear the dues as soon as possible.

   Any bonus that you get should be used to repay this debt before thinking of using it to fulfil your other plans. (Yes, the holiday can wait.) Same goes for personal loans. Although not as expensive as credit cards, personal loans, too, come with a high interest rate of 15-25 % per annum. Similarly, any overdraft facilities you may have availed of should also be cleared.

GIVE YOUR CHILD A BETTER EDUCATION

   Primary education has undergone a monumental change in the last few years. International schools and other high-end schools, which command a huge fee, are the order of the day. "You should look at your overall financial plan and see if the resources can be used towards some goals.

   For example, you can utilise any bonus received to put your child in a better school, if you feel the need to do so," suggests Prerana Salaskar-Apte , a certified financial planner and partner with The Tipping Point. The timing , too, would be apt, as the admission season is just around the corner.

HOME LOANS

   These are considered 'good' loans and no financial planner would recommend you to hurry with its repayment. Not only do home loans carry reasonable rates of interest compared with the other loan categories, but also offer tax benefits under sections 80C and 24. However, if you have a large loan, you may find the high EMIs a burden.

   "For instance, if someone earns a salary of over . 1.5 lakh and the EMIs amount to . 90,000, it is not a healthy situation. In such a case, you can consider part pre-payment of your housing loan to bring down your EMIs to affordable levels," advises Sadagopan. As a thumb rule, the total monthly loan outgo should not exceed 40% of your takehome salary.

DOWN PAYMENT

   For taking a home loan, the buyer has to arrange for funds — at least 20% of the house's cost — from his/her own pocket . This is a substantial amount. If you plan to buy a house in the next twothree years, you can set aside any bonus towards this purpose.

   "If the plan is to buy a house after three years, you can invest the amount in an ELSS (equity-linked savings scheme) fund. If you are planning to do so within one-two years, you should look at fixed deposits or fixed maturity plans. The decision also depends on your risk appetite," says Sadagopan. In the current interest rate scenario, banks offer attractive interest rates on fixed deposits.

TAX-PLANNING

   Usually, many start investing in taxsaving instruments only when the financial year is drawing to a close. It is best to start the process as soon as possible . "You should start off with taxsaving investments now (at the beginning of the financial year itself) and look at ELSS or PPF (public provident fund). This may be the last financial year (before the DTC comes into effect) in which you can avail of tax benefits by investing in an ELSS," says Salaskar-Apte .

   "If you are not convinced about investing the entire bonus amount in one go, you can opt for the systematic transfer route, where the money will be invested in a liquid fund initially, with a provision to direct it to an ELSS fund at pre-decided intervals," says Sadagopan. Before that, however, you need to ascertain if there is a need for tax-related investments . In many cases, the provident fund component and insurance plans would use up the tax breaks, obviating the need to invest elsewhere.

SPENDING

   This should be the last item on your priority list. It may be difficult to resist the lure of an overseas holiday during vacations , but it can wait till more pressing matters are taken care of. "How you use your funds depends on your situation. The only strict no-no for all individuals would be blowing up the money. There is nothing wrong with planned spending," says Sadagopan.

Source: Economic Times