Should You Use Your Diwali Bonus to Repay Your Debt or Invest It Instead?

November 9, 2021 Mutual Fund

Diwali brings so much of joy and happiness with sweets, gifts, shopping, and of course, bonuses. Most public and private companies in India follow a tradition of distributing annual bonuses to their employees during Diwali, which is why it is popularly known as the ‘Diwali Bonus’. Since Bonus is a reward for your hard work for an entire year, it is vital to use it wisely on spending, investing, or paying your debts. This article will help you decide where exactly you should use your Diwali bonus.

What are the advisable ways where you can use your Diwali Bonus?

A bonus is a financial compensation provided to the employees over and above their basic wages or salary. A company declares the bonus as a percentage of a basic salary of an employee, which can depend upon several factors, such as the company’s share value, annual turnover, new client acquisitions, etc. The bonus is handed over to you after the applicable tax deduction. However, if your bonus amount is higher, you might have to pay extra tax on it. Therefore, it is essential to do the exact bonus calculation before deciding on the options to use it. However, irrespective of whether the bonus amount is small or big, you can utilise it wisely and effectively to plan your finances better. Here are some of the advisable ways you can use your Diwali bonus:

1. Many people start spending on their credit cards even before the Diwali bonus is actually credited into their bank account. If you are among those, you are left with only one option – to repay your credit card dues. Not paying the credit card bill in full before the due date can attract heavy late payment fees and it can also negatively impact your credit score.

2. If you have running short-term loans like personal loans, loans on the credit card, etc., you can use your Diwali bonus to do a part-payment or clear-off these loans.

3. You can do a part-payment of some of your high-value loans, such as home loans, loans against property, car loans, etc., if you do not have any short-term loans to repay.

4. If you are fine with taking some risk with the bonus amount, you can use this amount to invest it in high-return generating financial instruments like mutual funds, shares, etc. with a long-term view. This amount can be used as your retirement fund or to plan a future for your children.

5. You can even use this amount to build your emergency fund.

6. If you do not have a term life insurance plan or a health insurance plan for yourself and your family, it will be a good idea to buy it with the Diwali bonus.

7. If you think, you do not have any dues and have invested sufficient amount for all the requirements, you can undoubtedly use your bonus to buy or spend on something necessary you have been eyeing on.

What are the benefits of using your Diwali bonus to repay your debts?

Although you can use your Diwali bonus for various purposes, it is advisable to first use this amount to repay your existing loans. It will help lower your financial burden and help you become debt-free sooner. Here are some of the benefits of using your Diwali bonus to repay your debts, instead of investing or spending it further.

1. Saves more:

The biggest advantage of paying your debts early is you stop paying the interest. If you have a long-term loan, the rate of interest will be lower. However, over the longer repayment tenure, you end up paying a high interest amount. Whereas, the rate of interest is usually higher for short-term loans. Hence, repaying the loans early would save the maximum amount you would have otherwise paid in interest.

2. Reduces financial burden:

Eliminating the dues by repaying them as and when possible, reduces your financial burden and gives you the peace of mind.

3. Stronger financial position:

Repaying the dues and coming out as debt-free makes your financial position stronger. If you do not have any EMIs to pay every month, you can efficiently manage your finances and invest more to secure the future of your children and your retirement.

4. Eligibility for other loans:

If you have utilised your entire credit limit, you will not be eligible to avail more credit. However, by repaying the existing loans, you can get eligible for other essential loans. Moreover, having lower credit utilisation ratio helps improve your credit score.

5. Might not get good returns on investment:

If you invest the Diwali bonus into a high-return generating financial instrument, there are chances that it will not perform as expected in the near term since such investments are equity-oriented. However, repaying the loans earlier will definitely save your interest amount.

6. Chances of unnecessary spendings:

Many people keep the bonus amount in liquid investment options like saving account, fixed deposit, etc. However, many times they get tempted to spend this amount on the next sale/offer or on something they have been eyeing for a long time. Repaying loans results in a compulsory saving which they cannot liquidate when they tempt to buy something.

What are the things to take care of while repaying the debts with the Diwali Bonus?

1. Many people try to repay their long-term loans with any extra income that they get. However, the rate of interest on such loans is comparatively lower and since the loan amount is usually huge, it is not possible and sensible to repay them earlier unless you have a small amount and short duration pending. It makes sense to repay your short-term loans and credit card dues with your Diwali bonus as it will save a high amount on the interest and late payment fees.

2. The rate of interest should not be the only criteria you should focus on while repaying your loans with the bonus. It is essential to check with the lender if there are any pre-payment or foreclosure charges on the loan. If the charges are high, it might not be a good idea to repay your high-interest loans first. In such a case, you can think about paying your long-term loans or using this amount for further investments.

3. If the chances of earning higher returns on the investment with low risk are more than the amount you would save on the interest, then you can consider investing your Diwali bonus instead of repaying the loans. However, if the risk is high then there is no point in taking the chance.

To Conclude:

It is advisable to repay the existing loans and credit card dues with your Diwali bonus on priority, as against investing it further or spending it on luxuries. You should always try to repay your debts as and when you receive any additional income as it will help you come out debt-free sooner. However, consider the above-mentioned points while repaying your debts to ensure you are making the right choice and utilising your Diwali bonus wisely.

This article first appeared on PersonalFN here