April or May is when most corporate employees receive their annual performance bonus. It is something that they eagerly look forward to. Once the amount hits the bank, most people are very excited to use it. It is important to plan how to use the bonus amount; otherwise, you may end up splurging it. In this article, we will discuss some ways to use the annual bonus for financial planning.
1. Repayment of high-cost debt
If you have any high-cost debt (credit cards, personal loans) outstanding, you should use the bonus amount to repay it. Most banks charge up to 3.5% per month (up to 42% per annum) for credit card balance carried forward. It makes credit cards one of the costliest loans in the world.
Do you have any personal loans for which the EMIs are going on? If the interest rate on the personal loan is on the higher side, you can use the bonus amount to prepay the personal loan amount. The partial prepayment or foreclosure will entail a fee, usually a percentage of the amount being prepaid.
The repayment of credit card outstanding and/or prepayment of personal loans will help you save on the interest costs on these loans. The interest savings can be channeled into investments to achieve financial goals.
2. Build and maintain an emergency fund
If you don’t have any high-cost loans, you may use the annual bonus to build and maintain an emergency fund. If you don’t have an emergency fund, you must start building one immediately. The balance in the emergency fund must be equivalent to 3-6 months of regular expenses.
If you already have an emergency fund, check whether its balance is adequate. If not, you may use the annual bonus to bolster your emergency fund.
3. Invest towards upscaling yourself
Today, the job market is evolving rapidly. With the advent of automation and Artificial Intelligence (AI), some existing jobs are becoming obsolete and new jobs are emerging. Hence, if your job profile requires you to upgrade your skills, go for it. You may use the annual bonus amount to enroll for a course that can help you improve your technical/management skills.
The course can help you learn a new skill or get certified in an existing skill. It can help you grow in your organisation or get a better job elsewhere. Upskilling is one of the best ways to use your annual bonus to accelerate in your current role and career.
4. Investing towards financial goals
If you are well settled in your job and your organisation supports you in upskilling, you can use the annual bonus for investing towards your financial goals. These can include building a child education and marriage fund and building a retirement fund for self and spouse.
If the annual bonus amount is large, avoid investing it as a lump sum in equity mutual funds. You should park the amount in a debt fund, such as a liquid fund. Start a systematic transfer plan (STP) that transfers a specified amount every month from the liquid fund to an equity fund.
If you want to use the annual bonus for your annual contribution to the Public Provident Fund (PPF), go for it. Whether you invest the annual bonus in equity or debt, make sure you invest it in a tax-efficient manner.
If you are filing your Income Tax Return (ITR) under the Old Tax Regime, under Section 123 of the Income Tax Act, 2025 (Section 80C under the old Income Tax Act), several financial products can provide a deduction from taxable income. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower.
5. Home renovation
If your house needs urgent repairs, you may use the annual bonus for it. Have you been waiting to change the flooring, paint the house, change the interiors, redo the old kitchen into a modular kitchen, etc.? Home renovation is one of the best ways of utilising the annual bonus.
Similarly, if you have been looking to replace home appliances like the TV, fridge, washing machine, or to buy a new AC, go for it.
6. Upgrading your devices
If all your above needs are taken care of, you can use your annual bonus to upgrade your devices. Buy the latest model of the mobile handset or laptop you have always wanted. You can take the much-needed family vacation with the annual bonus amount. The vacation is an opportunity to relax, rejuvenate, and come back to work refreshed.
In this article, we have discussed various ways of using the annual bonus. With a long list of things to do, it may not be possible to accomplish all of them with the annual bonus. In such a scenario, you may split the annual bonus into two parts.
You may use 25-30% of the annual bonus amount to fulfill your personal desires, and the remaining 70-75% can be used for financial planning purposes. You worked hard all year round to earn the bonus. Hence, you deserve to enjoy some of it while the remaining can be used for financial planning.
