How to make the most of your Annual Bonus or Raise

It's that time of year again, when most businesses have given out their yearly bonuses or raises. However, given the economic uncertainties caused by the COVID-19 Pandemic this year, many paid employees may have received a smaller bonus or none at all. Around 72.2 lakh individuals lost their employment in April 2021 and numerous employed people are at risk of losing their jobs in the future. So, if you have a job, an increment, and/or a yearly bonus, don't spend money right away. Use the additional money as a buffer for your future, given the current uncertainties.

The following is what you should do:

Invest after doing a comprehensive need analysis

When it comes to investing, determine your financial objectives and align your portfolio with them. Your asset allocation, or how much to put into each asset, should be determined by your age, income and expenses, assets and obligations, risk appetite, investing purpose, financial goal, and time to reach the goal. Don't invest on the spur of the moment or just to chase rewards.

For example, if your risk tolerance is high, your investment aim is capital appreciation (over the long term), and you have more than three years to fulfil your objectives, you can consider investing in an equity-oriented mutual fund. Debt-oriented mutual funds, on the other hand, may be appropriate if your risk tolerance is low, you want to achieve consistent returns while protecting capital, and your time horizon is three years or less.

Calculate the future worth of the objective after three considerations when selecting how much to invest for the goal:

• The cost of achieving the objective in today's terms,

• The rate of inflation, and

• The time-to-target.

Be more diligent and increase your investment

It's also crucial to be disciplined and persistent with your investments if you want to achieve your financial objectives. Investing through Systematic Investment Plans can help you achieve this (SIPs). A systematic investment plan (SIP) allows you to invest in little sums at regular periods, reducing the impact of market volatility through rupee cost-averaging and eliminating the need to time the market.

If you make payday your SIP day and then spend what's left after saving and investing, you'll be well on your way to achieving your objectives. Many fund houses now enable you to choose a particular SIP instalment date instead of the standard practise of picking default dates on the application form for monthly SIP payments, such as the 7th, 10th, 15th, or 20th of each month.

You can also increase your SIP contribution to coincide with your annual bonus. This can help you better combat inflation, increase the power of compounding, and achieve your financial objectives faster.

You can achieve this in one of two ways:

1) Each year on a set rupee basis. So, if you have a monthly SIP of Rs 10,000, you may raise it every year by Rs 1,000 or Rs 2,000, depending on your needs; alternatively, if you have a monthly SIP of Rs 20,000, you can increase it every year by Rs 1,000 or Rs 2,000, depending on your needs; or

2) On a predetermined percentage basis each year, such as adding 10%-20% to your present monthly SIP year after year.

Investors can automate step-up SIPs (also known as top-up SIPs) with some mutual funds, while others need a manual request through mandate.

Increase the size of your emergency savings

You can also set away a sufficient contingency fund with your bonus to prepare for a rainy day (also known as an emergency fund or a rainy day fund). Maintain a contingency reserve of at least 6 to 18 months' worth of normal monthly costs (including EMIs) in a separate Savings Bank Account or an Overnight Fund/Liquid Fund. This fund should only be used if you have unanticipated costs for which you have not budgeted. If you already have some money set aside, use the bonus to boost it to the amount needed for your emergency fund.

Paying off or reducing your debt

If you have any outstanding loans, use the bonus to pay them off or lessen your financial load. Prepay your loans in part or in whole using the bonus you've received. You will save a lot of money on interest payments if you do this. Furthermore, the money you save on loan repayment might be put to better use in the future.

Handle your money wisely so that it can assist you in achieving financial well-being and financial independence.