Things to do with your festive bonus

The festive season is just over and you have received that little bit extra in the form of Diwali bonus. While it is indeed heartening to see the extra money in your bank account, many are unsure about how to put it to a good use. The most important factor to help you strategise better is to treat the bonus as a regular income, and not particularly an added bonanza, which brings along with a strong urge to splurge on non-essentials.

Here are few ideas to spend the bonus amount received during wisely:

Settle impending debts

The festive season will serve as a good time to clear any impending debts you have in your kitty. In the order of priority, you should start by first clearing out your credit card debts followed by personal loan and later home or car loan. It is a matter of concern that the interest on the credit cards can be as high as 36% per annum and it leads to piling up of the debt. We can follow few ways to avoid paying high interest rate:

• Pay the outstanding amount on the due date
   
• No interest-free period on new purchases
   
• Convert to Equated Monthly Installments
   
• Deposit cash withdrawals back at the earliest
   
• Avoid using credit cards abroad

These simple practices will help you to save your interest outgo and keep your credit score strong.

Planning your emergency fund

Festivals are when we end up generously spending on impulsive purchases. But this Diwali we suggest you to take a step back and analyse if you have an emergency fund ready, in case of any eventualities.

As a rule of thumb, it is important to have an emergency fund – with equivalent savings to your six-months income. But how should one go about it?

It's quite simple actually – the first step is to determine how much you spend each month. Housing, transportation and food will likely be the categories that eat up most of your cash. For example, assuming monthly expenses for a family is Rs 20,000. Within this household expenses and transportation account for Rs 12,000. The family needs to build an emergency fund of at least Rs 1.2 lakh. But how should they approach it?

• The first step in building an emergency fund should be creating a corpus worth three months of house-hold expenses. Basis on the numbers above, Kaushik's goal should be to build a corpus worth at least approximately Rs 36,000.
   
• Once through with the basic liquidity of the fund, Kaushik should start directing a part of the emergency fund savings to investments which provide good returns in a medium-term (three to six months) horizon. Such investments help the emergency fund replenish on a regular basis.

Always remember that building an emergency fund takes precedence over most of the other goals that you may be saving for. All the periodic savings that are being made should be first assigned to the emergency fund till it is stocked-up.

Tax saving

Within a month or two from now, most employees will be asked to provide proof of tax savings to their employer. These last minute decisions regarding investments might lead to take a dip into your savings. If you are not able to investment on time, tax cut from your salary in these months will disturb your monthly expenses. A bonus can also be used for making tax saving investment to ensure you receive a better post tax income in coming months and keep your finances in manageable limits.

You can start by picking products from the section 80C basket which allows a deduction of up to Rs 1.5 lakh a year. If you were not able to use this limit till now, then you should opt for Equity-Linked Saving Scheme (ELSS) or Public Provident Fund (PPF) to save tax. You could also explore investing in National Pension Savings Scheme, Rajiv Gandhi Equity Savings Scheme or a Health Insurance – as they will provide you deductions over and above your Rs 1.5 lakh limit.

Reward yourself

While we have doled out a lot of financial advice, it also makes sense for us during this festive season. Any motivational strategy works best when there is a reward waiting for you at the end of it. So every time, you achieve your smaller goals, reward yourself.

Use this year's bonus as a means to move away from extravagance and reward yourself with simple pleasures – like a nice dinner, a long drive or even much required peaceful evening with your loved ones. Such rewards will indeed go a long way when it comes to accomplishing your savings goals. Make sure to never let go the rein on your finances – only then you can ensure that your next year is prosperous in a true sense.

EMERGENCY FUND

Rs 1.2 lakh – Emergency fund corpus

Rs 36,000 – Three months of household expenses

Rs 20,000 – Average monthly expenses for a family

PLAN YOUR FINANCES

• Build emergency fund equivalent to six months of income
   
• Spare some money for tax-saving investments

The writer is, head, personal wealth advisory, Edelweiss