Got Your Bonus? Time To Manage It Efficiently.
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A few months ago, I met a mid-aged man at a family gathering. After having spoken for a while, he confided in me that he would never in his life, waste his money on making investments, even in blue-chip stocks. Trust, me when I say I don't blame him for this notion against the equity investment as indeed equities can be brutal to your financial health if it isn't with proper thought, planning and guidance.
After having a brief discussion with him, I thought to myself that he must definitely be a conservative investor.
Cut to a few weeks later when I met approached me for consultation, he very enthusiastically informed me that he had recently experienced a windfall of Rs. 50 Lakh from the sale of a late grandparent’s property.
Cut to a few weeks later when I met approached me for consultation, he very enthusiastically informed me that he had recently experienced a windfall of Rs. 50 Lakh from the sale of a late grandparent’s property.
However, most of that amount had already dwindled down, courtesy of investments in penny stocks, on an exciting holiday to the Maldives and rather surprisingly, on horse race betting. When I commented on the unlikeliness of this occurring the last time I met him, he responded by joyfully saying, “Hey, I got the money as a gift.”
Though this type of money behavior isn't new as we all tend to fall for the fallacy of mental accounting but this was surely an extreme case of how disastrous it can be.
For example, say you have been thinking about buying a new car but have been holding off because you’re looking to make prudent financial decisions and are focused more on saving and repaying your loans. But, the second you get the money required to buy the car as a gift or through a lottery or maybe a big bonus, there is a shift in attitude from “I can’t” to “I can”.
One of the biggest examples of this fallacy we all have fallen is in getting our yearly bonus or incentives. Since bonuses aren't our usual recurring inflows, we tend to treat them differently than our normal paycheque.
According to a survey 85% of people tend to spend their yearly bonuses and or some unexpected inflow on luxury items like fancy gadgets or some extravagant outing. Many such examples can be observed from the stories of game show winners like KBC. People exit the show with whooping money and yet end up being in a financial mess.
Though there isn't one or two fit to all ways to handle your money matter as money means differently to different individuals. In this article let us get into a structured way to spend unexpected inflows to help you manage your finances in a smart way.
1. Clear out your debts and loans.
You may have availed of a personal loan or credit card debt to fund a lavish lifestyle. It would help to repay this debt with your end-of-year bonus rather than pay the minimum amount due on the credit card.
Before you think of saving or investing the amount it is always advisable to clear out your debt. It will not only help you reduce the mental stress of the loan, financially also it is the right thing to do.
think about it, isn't pointless investing to earn a decent return if you are repaying a personal loan that charges an interest rate of 15-17% per annum. Moreover, you may struggle to repay the credit card interest of around 24-35% per year.
2. Invest it towards an emergency fund.
The future is unpredictable and so is an emergency. It is very important to keep some funds aside for any unforeseen circumstances that may arise at any point. You should always plan your expense for the next 3 months period and accordingly transfer the money to a separate account in order to keep it handy and safe. Remember, the amount is for emergency and should be parked in instruments from where withdrawal is very easy and quick.The most common and effective way to maintain your emergency corpus to make sure it is liquid and gains a considerable return is to keep it partially in a separate bank account and partially in a liquid mutual fund.
3. Invest the amount for the long term.
After repaying debt and creating an emergency fund. It is time to top up your investment for attaining your short, medium and long-term financial goals faster and to create wealth.
4. Invest in learning and Upskilling.
Though this point may not give a direct boost to your finances, upskilling your ability and learnings will create an additional and sustainable stream of income. Taking up a career-enhancing skill such as a computer course, public speaking or financial programs. It helps if you focus on skills that can increase your existing income.
Never lose out on this opportunity. Do keep aside a pool of money to treat yourself, after all, it’s your hard work that has helped you earn the bonus.
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