Seven ways to use Diwali Bonus

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Many people have received their Diwali bonus. One needs to understand the difference between what you want and what you desire. If you have not used your Diwali bonus, here are a few ideas.

1.Create an emergency fund

The best way to utilize your Diwali bonus is by not spending it. Save it and create a contingency fund. Use the fund during a future emergency to fulfil your basic needs. You should have enough money from the bonus to cover your 3 to 6 months expenses, including EMIs and premiums.

2. Start investing in Equity funds through SIPs.

Equity funds are a good option if you have patience and willingness to take risks. But the markets are overvalued, so do not rush to invest money. Start with liquid funds and then with systematic investment plans (SIPs). Liquid funds provide slightly better returns than banks.

This strategy has two benefits. Firstly, SIP investments will protect your money from volatility. Secondly, money would not be in your bank account to get blown away easily.

3. Prepayments

Use windfall gains to reduce debts. Prioritize your costly loans. Credit card bills should be on the top of your priority list, followed by personal loans (12-18% interest). Do check if there are charges on prepayments.

Then pay off the small loans so that you completely tick them off the list. Then consider the low-cost loans with tax benefits, like education loans.

4. Child’s Education

An education fee is an expense that is rising 10% every year. MBA fees have increased by 400% since 2011. So, if your child is in school, you should already set aside his college fee.

Start early to meet the long-term investment with small outflows.

Invest in both debt and equity funds or hybrid funds to get an ideal mix.

5. Buy Life Insurance

Life is unpredictable. Buy a term plan from your Diwali bonus. Term plans are cheap and always start at a young age. A 30-year-old will pay 10,000-20,000 per year to receive one crore after 30 years. On the other hand, a 40-year-old will need to pay 18,000-20,000 to get the same cover after 20 years.

If you do not want recurring payments, go for a single term plan. You need to pay a sizeable amount without any renewals.

6. Buy Health insurance

COVID-19 has made everyone realize the significance of health insurance. Buy a floater health insurance of 10 lakhs which covers you, your spouse and two kids at 20,000-25,000 per year.

The plan is eligible for tax deductions so, the effective cost will be 14,000-17,500.

7. Invest in NPS

Invest a part of your bonus in NPS to get tax benefits. Under section 80CCD, Rs 50,000 invested in the scheme are deductible, over and above the ₹1.5 lakh limit under Section 80C.

NPS has a long lock-in period, and you can withdraw money only when you retire. But it ensures disciplined long-term investment. 

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