Received an Annual Bonus? Know How You Can Make the Most of It

Most social media and news channels have been busy emphasising the massive layoffs by big tech giants like Google, Meta, Amazon, and Microsoft. While an appraisal cycle has kickstarted, and just a few networks have been able to cover firms proclaiming bonuses and rewards to their competent employees, some organisations have been offering a double-digit hike in annual increments/bonuses to retain the talents.

Many of you may have received your annual increment letters, or a performance bonus may be on its way. While extra cash is welcome, handling it can be tricky as you need to juggle between multiple financial needs from your yearly perk. Given the current macroeconomic uncertainty, inflation and the looming risk of recession makes it crucial for any individual to make the most of their recently received bonuses. While organisations offer such annual increments to encourage their employees and appreciate their efforts, employees could use the same bonus amount to enhance their financial well-being and work a step closer towards achieving their goals.

If you are expecting your annual bonus this year, it may be tempting to start thinking about what you want to buy or plan an extravagant vacation. But before that extra direct deposit touches your bank account, think about how you want to utilise it. Whatever the size of your hard-earned bonus, consider how money may best benefit you.

Receiving a bonus or appraisal indicates that the organisation recognises your work. Instead of blowing your windfall on frivolous purchases, utilise it to improve your financial situation. Regardless of the inflation effect, where a significant amount is still spent on paying extra for necessities and higher equated monthly instalments (EMIs), a lot can be accomplished with this raise if you remain keen on efficiently handling your personal finances. If you recently earned your bonus and are unsure how to best utilise the increased cash flow.

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Here are 5 suggestions that will assist you to likely putting your bonus to effective use rather than splashing out on luxuries.

1. Get rid of high-interest debts

If you have high-interest loans hanging over your head, bonus money can be a way to make a dent in the balance and possibly pay off the debt entirely. Mostly unsecured debts, such as outstanding credit card payments, car loans, personal loans, etc., tend to come with higher interest rates. Paying off or reducing such debt from a portion of your bonus amount should be your priority. Otherwise, the money you pay in interest can cost you significantly more over time.

And millennials don't forget to reduce any student loans you might have. However, it may not seem like it at the time, reducing a portion of your main debt now while you have the cash on hand may be helpful in the long run. This year's annual bonus might be just the right option you were looking for to offload your debt burden.

2. Expand your emergency funds

If you took a hit from some unexpected expenses this year or haven't yet built an emergency fund, utilise your bonus money to make sure you have a financial safety net to weather any unforeseen occurrence, such as a job loss, medical emergency, natural disaster or pandemic, and so on. Saving enough money to cover unexpected expenditures takes a lot of effort. Unexpected events may be a source of financial stress, and many people are obliged to take out personal loans to cover unexpected expenses. With so many firms laying off staff, now is the time to start working on your emergency fund.

You may increase the amount of your emergency fund corpus, or if you don't currently have one, attempt to establish one with your bonus. Though there is no hard and fast rule for how much money you should keep in your emergency fund, it should ideally hold 6-12 months' worth of expenses, including loan EMIs. Stash your emergency fund in a high-yield savings account or in debt-oriented liquid funds so that it is ease to access in times of need.

3. Invest your bonus towards your goals

Investing your bonus may be an ideal way to put that additional cash to use and perhaps boost your financial stability over time. When it comes to investment, every penny counts. You must know how to make good use of the money in hand and maximise gains whenever given an opportunity.

As you are aware, inflation erodes your income every single day. Thus, it is imperative that you invest your new-found wealth in mutual funds that offer inflation-beating gains in order to meet your crucial financial goals. With the bonus in hand, you may consider to begin investing in mutual funds through regular Systematic Investment Plans (SIPs). If you have a longer time horizon and are comfortable with high risk, you may think about investing in equity mutual funds. This can potentially provide better gains over the long term but be aware that every investment carries certain risks, and past performance does not guarantee future results.

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If you currently have a mutual fund portfolio, review it and consider diversification by investing in appropriate mutual fund schemes to get the right asset mix. You could also consider increasing your SIP amount in schemes that are compatible with your financial goals to enhance your investment in mutual funds.

4. Boost your retirement corpus

Paying off your debts is an excellent step, and the next best move is to consider putting part of the windfall money into your retirement fund. Investing for your golden years is an excellent way to use some of your bonus money.

Many of you may believe retirement is something for later years in life and may not even begin saving for it. This, however, will result in a little corpus to cover expenses, including inflation, throughout your golden years. As a result, it is essential to start retirement planning as soon as possible and try to maximise your retirement corpus. Based on your eligibility, you may consider investing in diversified mutual fund schemes, which can help you achieve inflation-beating gains in the long run.

Adding a portion of your bonus to your current retirement corpus will increase the corpus and allow you to obtain the required amount sooner or on time.

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5. Extend your insurance cover

Do you have enough insurance coverage? Many individuals choose insignificantly sized insurance plans without understanding the relevance of the coverage quantity desired. If you have an insignificant insurance policy, you may use this incentive to either purchase a new insurance policy with a better coverage amount or extend your existing policy to obtain more insurance coverage.

Even if you have a contingency fund, it may not cover all of your medical bills. As a result, the need for adequate health insurance cover arises that will cover the skyrocketing medical expenses for various treatments. Similarly, a term life insurance policy is equally important as it will assist in fulfilling your family's financial needs even in your absence (unfortunate death).

To conclude...

The bonus amount is the monetary compensation for your work. This year, use the bonus sum to build your financial future. Keep the aforementioned considerations in mind as you use your recently received bonus to better manage your finances. It makes a lot of sense to put that additional money towards something that will benefit your future, lessen your financial stress, and give you peace of mind.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.