Stash away that bonus!

If you belong to that class of employees who gets a bonus at Diwali time, lucky you! Today you would be sitting on that bonus in your hand and the whole family would have a claim on that.

Who are the claimants on this bonus? Lots in fact!

Thanks to the fact that companies want to look good, they may not cut all the income tax that is actually due on the bonus. Thus if you are in the 30% slab and the company has deducted only, say 10% tax, first set aside the balance tax payable in a money market mutual fund or a bank account – this amount actually never belonged to you, so cool it!

Many people anticipate the bonus and spend on the credit card- which means that payment will be due in 45 days. If you have spent on your credit card, pay it off in full, as soon as you get the bonus. Even non-Diwali purchases sitting on your credit card should now be settled in full. Makes sense to pay off the most expensive debt as soon as possible, correct? Even if the credit card amount is due only after 15 days pay it off TODAY!

What is true for a credit card debt is also applicable to a personal loan that you are paying off slowly. Use this money to accelerate the repayment of the loan. In case you are struggling with a floating rate home loan, use a part of the bonus to pay down a part of the loan so that you reduce the tenor of the loan.

If you have decided to make some purchases specifically with this bonus go ahead and do it. Hopefully you have gone on to the net and done your short-listing before you make your actual purchase.

Having said all that, in case you have no liabilities, rejoice! Then you have some better choices with the end use of your money.
When ever you get a lump-sum (I mean post of tax) and you have an urge to splurge – split the amount into 3 parts.

One part you should use for current consumption (Diwali gifts, clothes, sweets etc.) put one part for your deferred consumption (say your pension accumulation) and use the third portion to pay for some shorter term goal – say as a part of the down payment for your car purchase. Thus a portion goes into immediate gratification of needs, one to a slightly deferred gratification of needs and one to a more deferred gratification! Remember that your retirement money is there to feed you when your earning capacity is limited or zero.

It is always nice to work towards a goal – upgrading a car, upgrading a house, having an emergency fund, children’s education, retirement corpus building, repaying a home / credit card loan are all goals towards which most of us have to work. So use your balance money to do any or all of these and the excess money can be splurged at Diwali.  One important thing to remember is that many people in our country cannot afford Diwali expenses – and crackers make many elder people ill. So in case you have been feeling nice about your portfolio going through the roof and feel like giving some money for charity, now is the time.  My daughter’s school and friends have brainwashed her – she says no to all types of crackers – noise, smoke, scares birds, scares animals, etc. – but it is your call!

Yes, this is also the time when you actually have some money to give to charity. Donating some part of this money to a charitable trust would be good. Visit www.akshayapatra.com and make your contribution.

Also remember that when you have money many people would like to take it away from you promising returns that are in the stratosphere. Be careful of these “un holy” kinds of returns. In case you think these returns are too good to be true, you are correct. Be careful. Diwali is also Lakshmi Pooja day – be respectful. Use wealth wisely, protect yourself from cheats – financial education helps!