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Splurge that hefty bonus the right way

t’s a good strategy to pre-plan your bonus amount, as this will also compel you to revisit your current financial situation

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It's that time of the year when the much awaited “bonus” makes a grand entry into your bank account. The hefty bank balance would make you drool in joy, temptation to experience the French Riviera to buying a fancy car could crowd your mind. Beware! One frivolous spend can make the funds disappear from your account. So instead of succumbing to your temptations, keep away all possible “not-needed expenses”. Instead, make a structured plan for all your “expensive indulgences” without losing focus on your long term financial aspirations. 

This is not to say that you don't go on a shopping spree at the monsoon sale, but moderation is a virtue. 

Take for instance Rohit Kumar, 35, vice-president in a leading MNC. His current priorities involve a home loan of Rs 75 lakhs, education expenses for his daughter and retirement planning for himself and a dependent spouse. In his annual appraisal, Rohit was awarded a bonus of Rs 15 lakh. 

To achieve his long-term financial goals, and to make sure his bonus is appropriately fitting, Rohit should make a balloon payment. This will help in reducing his debt, gain a tax arbitrage, and reduce interest outflows if there is a rise in the interest rate. The equated monthly installment (EMI) reduction will help increase cash in hand, which when diverted towards SIPs will steadily increase the wealth kitty. 

He further suggests that Rohit should keep a minimum of 3-6 months of monthly expenditure as a contingency fund. Thus, 20% of the bonus (approximately 2-3 lakh) should be invested towards contingency planning through liquid mutual funds or bank fixed deposits. Since his long terms goals involve saving for his 2 year old daughter's higher education and his retirement, the balance amount available should be aligned to equities. Considering the time horizon for his long term goals is almost 18-20 years, equities as an asset class can absorb volatility during this time period and hence, prove to be most profitable. 

Lastly, Rohit also has an ongoing systematic investment plan (SIP) of Rs 50,000. Thus, Rs 2.5 lakh can be invested in diversified mutual funds. The rate of return should be approximately targeted at 10% (inflation adjusted). He can gradually increase the SIP over the years, adjust the mutual fund allocation, if required, and evaluate performance at regular intervals. Additionally, since he has received a lump sum amount, this is also a good time for him to increase his risk coverage. Rohit's health insurance coverage as a family floater is Rs 20 lakh. Basu recommends that he should increase this to Rs 30 lakh. With medical inflation in double digits, it's an investment worth making. Also, it is recommended that Rohit should increase his life cover, from Rs 2 crore to Rs 4 crore. 

Lastly, Basu stresses that saving before spending is always a good financial practice. Frugality is a virtue and can give you rich dividends for your future. It's a good strategy to pre-plan your bonus amount, as this will also compel you to revisit your current financial situation and your financial goals. Several factors such as macroeconomic environment, political issues, global market dynamics, and even rains can have an impact on your wealth management plans. So if your aim is to be financially strong, make your bonus work towards your wealth goal. 

The writer is head, wealth management, Tata Capital

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