Getting an annual bonus often leads to a deluge of varied feelings, ranging from the glee of retail therapy to the satisfaction of contributing more to a financial goal or even utter confusion at how to go about allocating those funds. If the last feeling is the one that has been paramount in your mind, then read on to understand the 5 steps to make the best use of your bonus.
1. List down the financial goals you are pursuing
An annual bonus is the best means to put in a booster to your journey of achieving a financial goal. Be it accumulating for a down payment on a house or retirement or saving for your child’s education, ensure you list down all your goals that you wish to achieve with the money you earn and invest. While listing down your goals, ensure you have an idea of the amount for it’s fulfillment as well as the time when you would be needing those funds. One can refer to the financial planning section in their Moneyfront login to map and track these goals.
2. Calculate the gap for each of the goals
For most of these goals, you would have a plan as to how you want to get there. This could be for goals that you have already started working on or even a goal that you have just now discovered for which you have concluded the required run rate or monthly investment. When you have a plan for all the goals, there might be some goals that you have a foreseeable gap towards achievement. Make the calculation for any goals that you can predict and list them with those goals. One can use one of the many calculators for this purpose: https://www.moneyfront.in/tools/retirement-calculator.aspx
3. Prioritize the goals to invest in
Now that you have the goals in place along with time to achievement as well as the possible gaps, prioritize the goals to which you should give your booster shoots. The more urgent and upcoming goals should be prioritized as most investments need ample time to give the real potential of returns. For instance, equity is an asset class that you should be invested in for at least 3 years. However, if you do decide to contribute to your upcoming goals, ensure they are important enough and cannot be done with a lesser amount.
Another approach that you could try is to zero in on contributing to your most important goals. For instance, retirement is one of the goals in your list and you decide to give it paramount importance. Even though it remains far into the horizon, contributing to it would still make sense.
4. Decide on mutual investments as per time horizon
Mutual Funds remain one of the best yet simple financial assets to create wealth, compounded over a long period of time. However, Mutual Fund is the name of a big category that is definitely not homogeneous. Your choice of mutual funds should depend on the time that you intend to stay invested, which in turn would be impacted with the time to your financial goal.
As a simple rule of thumb, debt funds work well as a diversifying instrument in the portfolio. For any period more than 3 years, some exposure to equity works better. As the risk and volatility of the mutual fund category increases, so should your time horizon for investing in the same to give your investment ample time to ride out the volatility. As a rule of thumb, consider hybrid funds, large cap funds, multi-cap funds, focused funds, mid cap funds and small cap funds as an ascending level of risk for major equity mutual fund categories.
5. Break big lumpsums through STP for a disciplined entry
When we consider investing our annual bonus, our instinct tells us to do it all in one go and get it done with. However, the last 12-18 months are the best witness to the fact that be it debt or equity, financial markets can be immensely volatile.
Instead of investing big amounts in one go, a better option is to do it in smaller chunks through the Systematic Transfer Plan or STP mode, ideally over a 6 month period. STP is a process by which the amount initially goes into a liquid fund and gets invested by automatically distributing a large amount into smaller equal chunks over a predefined period. The biggest benefit of STP is the fact that as an investor, the probability of getting a fair average purchase price is much higher as you end up entering the market at multiple points rather than one.
Personal Finance can be simple when planned well. Use this 5-step process to make the most efficient use of your annual bonus and aid the fulfillment of your financial goals.