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Answers to a few questions will help you find the best way to use the surplus cash coming your way soon.1. Does your family have health cover?Don’t rely on the group cover from your employer because it may not provide sufficient coverage.If your answer is No, then…Buy a family floater health plan to cover all family members. A Rs 10 lakh floater plan that covers a husband, wife and two kids will cost about Rs 22,000-30,000 a year depending on the age of the oldest member. Buy from a company with a healthy claim settlement record and a good reputation for customer orientation.If your answer is Yes, then…move to the next question2. Do you have adequate life insurance?Your life insurance cover should be at least 8-10 times your annual income and outstanding loansIf your answer is No, then…Buy a term insurance plan that covers you till the age of 60-65 years. You could buy a single premium plan that pays the entire premium at one go. A 35-year-old can get a cover of Rs 1 crore for 25 years by paying Rs 2.5 lakh. The entire bonus will go into this but this one payment will take care of your insurance needs for the rest of your working life.
How to use your bonus
3. Do you have an emergency fund?You should have enough to cover 3-6 months of expenses, including loan EMIs and insurance premiums.If your answer is No, then…Put your bonus in a short duration debt fund or a sweep-in savings account. You won’t earn too much, but returns are not important here. Also, don’t dip into this fund unless there is a real emergency. If used for an emergency, replenish the fund as soon as you get enough liquidity.If your answer is Yes, then…move to the next question4. Do you have an outstanding loan?Prepaying such loans can save you more than what you earn from fixed income optionsIf your answer is Yes, then…Long-term investments build wealth, but long-term debt burdens you with very high interest costs. Though policy rates have been lowered, home loan rates have not fallen too much. Use your bonus to pay off your outstanding home loan. Prepaying four EMIs can reduce the tenure of a 20-year loan by almost two years.If your answer is No, then…move to the next question5. Are your long-term goals on track?Use the surplus cash to save for your child’s higher education or your retirement If your answer is No, then…Your risk appetite will determine where you invest that money. If your risk appetite is high, go for equity mutual funds. It’s not a good idea to invest a large sum in equity funds at one go. Instead, put the money in a short duration debt fund and start systematic transfers into an equity fund. Balanced advantage funds suit moderate investors while low-risk investors should go for PPF.If your answer is Yes, then…Congratulations. You have covered all your needs, so you can go ahead and spend your bonus on things you want.
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