Summary of this article
Know how salaried employees can use their festive season bonus effectively for
The festive season is in full swing in India, with its lights, feasts, and family gatherings. Salaried employees also look forward to the occasion, awaiting an annual bonus. Companies often reward employees with an annual bonus during the festive season. This lump sum is given as a reward for hard work. However, it can also act as a powerful tool for boosting your long-term financial health.
Even though the temptation to use this bonus to splurge is high, a balanced and thoughtful approach can help individuals enjoy the present festivities while making the most of their bonus. Here is how employees can make the most of their festive bonus:
The 'Pay Yourself First' Rule (The 50:30:20 Strategy)
Instead of looking at the bonus as an "all-or-nothing" choice between saving and spending, individuals can consider adopting a structured approach. A popular, balanced method is the 50:30:20 rule. As a part of this rule, individuals can allocate 50 per cent of the bonus to building wealth and achieving long-term goals. Then 20 percent of the bonus amount can be used to pay off debt, clear liabilities, and create a safety net. The remaining 30 per cent can be allocated to spending without guilt on gifts, clothes, and family dinners.
50 Per Cent for Your Future: Invest & Slay Debt
As a part of the 50 per cent allocation towards clearing debt, individuals should pay off or significantly reduce high-interest debt like credit card bills or personal loans. This provides an immediate, guaranteed "return" by saving you from hefty interest payments. After these debts have been paid off, individuals can prioritise their long-term investments. Some popular ways of doing this are investing in a lump-sum investment like a mutual fund, topping up your existing SIPs, or buying quality stocks.
20 Per Cent for Savings & Goals: Build Your Safety Net
By allocating 20 per cent of the bonus towards creating a buffer, you can get closer to achieving your medium-term goals. These funds can be used to supplement your rainy day money or emergency fund. Notably, it is advised that you should have at least six months of living expenses saved. Additionally, this money can also be used to kickstart or add to a fund for a planned big-ticket purchase, like a down payment for a car, a family vacation, or a home renovation.
30 Per Cent for Festive Spending: Celebrate Mindfully
The remaining 30 per cent can be used for festive spending. By making a fixed allocation of 30 per cent individuals can avoid overspending and the financial hangover that can follow.
Now that you have an idea regarding how you can divide the bonus to account for both spending and investing, you must put it into practice. Once you receive the bonus amount, you should let your excitement settle and then allocate the amount in the 50/30/20 ratio. For example, if you received a Rs 50,000 bonus, you can allocate Rs 25,000 to debt and investments, Rs 15,000 for festive spending and use Rs 10,000 to bolster your savings.
By planning your finances before receiving a bonus, you can honour both your present desires and your future well-being.
