7 ways to use your annual bonus to accelerate your financial planning journey

Here are seven ways you can use your annual bonus to speed up your financial planning journey.

It is that time of the year when you can look forward to the much-awaited annual bonus. You may have already made plans on how to spend it. However, this year, rather than spending the bonus on buying the latest mobile, gadget, vacation, etc., use it differently. In this article, we will look at seven ways of using the annual bonus to accelerate your financial planning journey.

Use a small portion to treat yourself

Before you get down to the business of using the annual bonus for financial planning, you may set aside 10-20% of it. You can use this amount to treat yourself and your family. It is your well-deserved bonus for which you worked hard the entire year. Hence, you may use a small portion of it to enjoy.

Repaying high-cost debt

The first step towards deploying your annual bonus is to use it to repay any high-cost debt you may have. These include credit card outstanding, personal loans, etc. Credit card outstanding balance carried forward beyond the due date attracts an interest rate usually in the range of 3 to 3.5% per month (36 to 42% p.a.).

Similarly, personal loans are given out at an interest rate, usually in the 10 to 18% p.a. range. There may be some charges for prepayment or foreclosure of personal loans. Please check on these charges. If you have borrowed any money from your family members, relatives, friends, colleagues, etc., you can return it from your annual bonus amount.

There is no point in using the annual bonus money for investments when you have a personal loan and credit card outstanding at such high interest rates. Hence, you may use the annual bonus to repay these loans first and then use the remaining money for financial planning. It will help you in improving your overall financial position. Reducing your debt burden frees up cash flows, which can be used for other financial goals.

Building or replenishing the emergency fund

Once you have repaid high-cost loans, you may focus on the emergency fund. The emergency fund is meant for unexpected and unplanned financial emergencies. The emergency fund can be equivalent to 3 to 12 months of expenses.

If you don’t have an existing emergency fund, you may use the annual bonus to build one. If you already have one, you should check the amount in it. Check whether you need to replenish it or increase the emergency fund amount.

Upgrade your skills

You can use the annual bonus to enrol for the course you have been eyeing for some time. It will help you upgrade your skills. Being updated with technology/industry will help you get better opportunities, pay hikes, promotions, etc. It opens up better opportunities within the existing organisation as well as outside. Remember Warren Buffett’s famous quote: “The best investment you can make is in yourself”.

Investing in yourself need not be restricted to just upgrading your skills. You can use the annual bonus to invest in your health, personality development, improving relationships, developing a hobby, financial wellness/literacy, etc. For example, you can invest in an annual gym subscription, yoga class, weight-loss program, meditation retreat, sports, or any other fitness activity.

Investing towards tax planning

Some people start doing their tax planning in February or March. At this time, the HR Department or Finance Department starts asking for investment proofs to avoid TDS from salary. Some people are not able to arrange the money for investment at the last moment. Hence, they are not able to do tax planning fully, and as a result, they end up paying tax.

To avoid such a scenario, you can use the annual bonus money for investing towards tax planning. If you want to invest in PPF, you can invest a lumpsum amount at the start of the financial year itself. It will help you earn interest for the entire year. If you want to invest in an ELSS plan, you can invest a lumpsum amount in a debt/liquid fund and give a systematic transfer plan (STP) instruction. A specified amount will be redeemed monthly from the debt fund and reinvested in the ELSS plan through a systematic investment plan (SIP).

Investing towards financial goals

You can use the annual bonus for investing towards your financial goals. Some of these include building a fund for a child’s higher education and marriage and a retirement fund for self and spouse. Over and above your regular SIPs, when you invest additional money towards your financial goals, you will be able to achieve them faster. Thus, the annual bonus can help you accelerate your financial planning journey.

Prepayment of home loan

You can use your annual bonus to prepay a part of your home loan. For example, you can prepay an additional EMI, a specified lumpsum amount, etc. Regular prepayments will help you to save the interest cost and finish the home loan before schedule. You may consider prepayment during a high interest rate regime.

In this article, we have discussed the various ways you can use your annual bonus for financial planning. However, some people spend in advance in anticipation of the bonus receivable in future. Don’t make the mistake of doing that. What if the company delays or skips the annual bonus payment for a particular year due to bad financial performance or any other reason? Hence, you should spend only what you have.

You should plan the annual bonus usage only after you receive it. Rather than splurging the money on the latest gadget, vacation, or lifestyle expenses, consider using it for financial planning. You may not be able to fulfil all the above seven goals with a single year’s annual bonus. However, you can use the bonus every year to check a few items from your financial planning to-do list.

Apart from the annual bonus, you can use amounts such as the income tax refund, maturity proceeds from a financial product, any other windfall gains, etc., to meet your financial goals. It will help you accelerate your financial planning journey and achieve financial freedom earlier than planned.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.