Festivals call for celebrations and no celebration is complete without an exchange of gifts. And spending on these gifts would be boosted with the bonus that would be given by many employers around Diwali. Spending this windfall income is a tempting option, given the festive spirit and discounts both in retail outlets and e-commerce websites.
However, before your swipe your card or click on ‘buy’, it’s important to resist cluttering your house and depleting your bank account with unnecessary purchases. Financial discipline is what you need to exercise during this time and to help you do that, we bring five ways in which you should make use of that money.
Asking you to not spend maybe asking for too much, especially when it’s pouring discounts. But what is important is that you keep your head above water and for that it’s important that you spend wisely. Stick to a budget and purchase only what you need. “The first thing I would suggest anyone is to clearly understand what they need to spend on, and the budget for that,”said Suresh Sadagopan, founder of Mumbai-based Ladder7 Financial Advisories.
Discounts don’t increase your need, they only help you get a good deal on what you need, or may be not really need. To get a good deal you need to be a hard-nosed shopper. Research and compare to make sure you are actually getting a good discount. Also it’s important to draw up a budget and stick to it. Don’t overstretch the budget because that LED television is available at a never-before discount. Don’t buy it if it is beyond your budget.
Create an emergency fund
You can put the money to better use by creating an emergency fund or adding to it if you already have one. “A minimum of 3 months’ expenses should be kept as emergency funds. If possible, one should try to keep aside 6 months’ expenses,” said Manish Hemrajani, co-founder, Finaskus, an automated personal financial planning service website. However, “One should keep the funds invested in liquid funds, instead of keeping them in a savings account, as the former can give better returns,” he added.
Pay off debts
Borrowing may never be a good idea, but when you borrow at a high interest rate, paying that off should be a priority. “Some loans like personal loans may come at a high interest rate and it makes sense to repay,” said Sadagopan. Hemrajani agreed, “Credit card outstanding should be paid off first, followed by personal loans and car loans. The rate of interest on credit card debts can be as high as 36% per annum.”
However, paying of some loans may not be useful. “Home loans will inherently come at low rates and will also be able to provide tax benefits, which makes the loans even more low cost. These loans need not be paid off (before tenure), especially if the exposed loan amounts are not significant and servicing them does not pose a problem,” said Sadagopan.
Given that the income tax deduction for home loan interest is capped at Rs2 lakh a year under section 24(b) of the Income-tax Act, 1961 for a self-occupied house, prepaying the home loan makes sense if the outstanding loan amount is more than Rs25 lakh. “This is because the Rs2 lakh deduction limit at the prevailing interest rate of about 9.25-9.5% per annum, will get exhausted within a loan amount of Rs25 lakh, so prepaying outstanding loan amount in excess of Rs25 lakh makes sense,” said Hemrajani.
Yes this is a one-time pay out, but it’s significant enough and should definitely contribute towards realising your financial goals. “Diwali bonus can help in taking care of some significant expenses like vacations or in augmenting one’s investment corpus for long-term goals. Ideally, bulk of the bonus amount should be allocated towards long-term investments,” said Sadagopan. In terms of long-term goals, retirement is definitely top priority.
According to Hemrajani, building a retirement corpus is something that everyone should plan for, as there is lack of government-backed social security schemes in India. “A person should aim to accumulate a corpus that can generate at least 70% of the last-drawn salary as monthly income post-retirement,” he added.
In terms of picking long-term financial products, you can look at products that also give you some tax benefits as the bonus gets added to your total income for the year and is taxed accordingly.
So you need to evaluate how this additional income can help you save taxes. You can pick products from the section 80C basket that allow for a deduction of up to Rs1.5 lakh a year. If you were unable to use up this limit till now, it makes sense to go for options like equity-linked saving scheme (ELSS) or Public Provident Fund (PPF) to save tax.
Gift and Donation
There is nothing better than being the reason for making someone smile. Giving away some part of your bonus as gifts and donation, to loved ones or the needy, is a good idea. Moreover, your good deed can also help you save taxes. Donations to some of the specific organisations or funds offer deductions of 100% or 50% of the donated amount, under provisions of the income tax act.
Once the bonus gets credited into your bank account, plan before you spend it, so that you feel good about it for the rest of the year.