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Use bonus money to pay off high-interest debt
Published On , 19 Apr 2016 By Times Of India
April is the month when a large number of salaried people receive their annual bonuses. These are onetime lump sum payment that employees receive mainly for good performance during the previous year and there is no guarantee that such payments would be repeated.
Often people receiving bonus resort to binge spending. Some, however, prefer to invest wisely for gains in future.
Financial planners and advisors say that rather than spending the lump sum bonus money and exhaust the whole sum, it’s always better to invest, at least a large part of the bonus amount with your eyes on the future.
Pay off high-interest bearing loans/Debt
According to Satyam Pati, head of content at Scripbox, although the issue about how to use such lump sum receipts like bonus amount should be dealt with at a very individual level, still there are some rules that investors could keep in mind. For one, one should consider using the bonus money to pay off high-interest Debt.
A search on the net for the annual rate of interest on personal loans throws up results which show this rate could start at about 11.5% and can go to as high as 24%. On the other hand, outstanding dues on credit cards could attract rate of interest as high as 2.5% per month, which when compounded comes to an annual rate of nearly 35%. So instead of keeping your bonus money in bank FDs which can give you around 7.5%-8% annually, financial advisors say it makes sense to pay back such loans which come with a high rate of interest.
Secondly, an investor could consider building an emergency fund to meet unforeseen exigencies in life. “If one already has an emergency corpus in place__which ideally should be equal to six times the monthly expenses__ then he could consider padding up the corpus,” Pati said. Usually people keep a part of their total portfolio in lowrisk investment products like bank FDs or Liquid Funds so that, in case of an emergency, the money could be taken out within a day or two.
Short/Medium/Long term investment
The third option could be to invest in short, medium or long term investment products, as per one’s individual needs. “For example is one is planning to buy a car in 3-5 years, then he could put this money in a fund which is suitable for similar investment horizon. If one wants to invest the money for the long term, he could invest in Equity funds or directly into equities,” Pati said.
Top-up health plans
A regular policy reimburses hospital bills up to the sum insured while a top-up plan covers costs after a certain threshold is reached.
For instance, when you are hospitalised, the insurance company will pay up to the set sum insured limit. The top-up, on the other hand, will come in picture after a certain amount, has been crossed. It'll pay for the claim amount over and above it.
It is the additional coverage for people who have an existing individual plan or a mediclaim from the employer. It is for reimbursement of expenditure which arises out of single illness beyond the limit of the existing cover.
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