Appraisal season is here. It’s time to fill out the appraisal form and sit down with your manager to have “the talk.” Everyone hopes to get that yearly bonus and salary increment they have worked hard all year for.
With career growth, responsibilities grow. Ideally, one should ensure that their wealth grows in line with their future goals. Performance appraisals are usually accompanied by bonus payouts and salary hikes. One might be inclined to splurge and buy that car or the new mobile phone but if they can be judicious with their spending they can plan better for much bigger financial goals in future.
Break the rule
A common rule of thumb while saving is to use the 50/30/20 approach. 50% of the salary is used for essentials and non-descretionary spending like rent, grocery, electricity. 30% on wants and luxuries like clothes and eating out, and the remaining 20% is set aside for investment.
This traditional approach should ideally be tweaked when one gets a lumpsum amount. This amount can come from yearly bonuses, past investments maturing, gift from family and relatives, etc. In such a case, one must opt for the reverse 50/30/20 where 50% of additional income is saved, 20% is spent on lifestyle choices, and the remaining 30%, is allocated towards needs. It will help increase the savings component of income and allow compounding to work its magic.
Here are five ways to use you annual bonus effectively to enjoy benefits in future :
Pay off loans
If you have high-interest debt looming over your head, bonus money can be a way to prepay or possibly pay off the debt entirely. Credit card debt or personal loans are typically high interest debt and should be paif off first. Interest rates have been going up off late which has increased monthly EMIs significantly. Frequent prepayment of loans every year can help reduce the interest burden considerably.
Build an emergency fund
If you do not have an emergency fund or were hit from some unexpected expenses this year then you should use your bonus money to ensure you’re covered.
Financial surprises like a job loss, natural disaster or unexpected renovation can strike anyone, anytime. One should ideally build a fund worth 3-6 months worth of expenses to prepares for such emergencies. This corpus should be invested in highly liquid instruments like bank savings account, short term FDs or liquid funds so that they are accessible all the time. This can give you a back up and more importantly a peace of mind during such rainy days.
Add to your SIPs
Paying down debt and building an emergency fund are great first steps and the next best step is to consider investing for retirement. SIPs are the easiest way to invest, it promotes regular investments and maintains investment discipline. One can add a one-time boost to these investments using that bonus. The purchase of additional units to increase their initial investment amount is also available, and there are always new funds one can explore depending on their risk profile.
Invest in yourself
The extra income can also be utilized to upskill yourself. Is there a job skill that you have always wanted to learn? Using your bonus amoun to learn that skill could be a great way to improve your earning potential at your current job and also prepare you for a better job in future. You could also use that bonus amount to learn some personal skills that can be a great source of satisfaction, too. Learning a new musical instrument or a new foreign language can all be great ways to make your life more fulfilling.
Financial prudence is essential but one should not deny themselves occasional treats. Proper planning ensures that spending on something fun or luxurious does not derail future plans. One can set up a fund to start saving for goals like a vacation, and excess can be invested.
Annual bonuses are a treat and they should be used mindfully so that it improves your future, reduces your financial stress and also help you enjoy occasional luxuries in life.
We hope the performance review goes well for you and you get that well-deserved treat. However, if things do not work out well and one has to look for opportunities elsewhere, here is a guide to help manage finances in tough times.
Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time.