Strengthen your financial security with Diwali bonus

Amar Choudhary

Diwali is an important festival in India — not only for its religious importance to a majority of Indians, but also because of the financial kicker it brings to an even larger number of Indians, in the form of an annual bonus.

Make resolution first

Yes, festivities do deserve some indulgence, shopping and spending on crackers, lights, new clothes and new items for the household (and the e-commerce biggies, apart from all the retailers around, are at their best to make sure you do enough of that and more). But the first advice to you from a financial planner would be to have the resolve to strengthen one’s financial position, and the rest would follow from there.

Clear payments

The second advice then, if you followed the first, would be to clear your arrears. There is no better opportunity than this, to repay your borrowings, be it from your friends, your business associates, or your bank. Any credit card debt or personal loan is typical example of high-cost debt, where the holding cost outweighs the benefits from a deferred cash outflow. Not only will this improve your financial position, but it will also give you a peace of mind, which is necessary for prosperity.

Set aside an emergency fund

The third advice, even more relevant if you needed to follow the second, would be to set aside an emergency fund. Avoid the situation of getting into high-cost loans again. Life is uncertain and throws challenges at you all the time. It is important that you do your bit to be prepared for those, at least financially. There could be a sudden situation like an accident, health issue or job loss, or an impending cost like child’s education or a family function, and you may then need funds beyond your monthly inflows. It is better to have these parked safely beforehand rather than rushing to get a high cost loan again. It would be prudent to set aside 3-6 months of your monthly expenses, and the Diwali bonus can help you create a part of it at least. Also, it is better to not keep this money idle in a bank account but invest it into liquid mutual funds backed by government bonds, which give you almost twice the returns from a savings bank, and your money is available to you at a day’s notice when needed.

Buy adequate insurance

The fourth advice would be to buy adequate insurance for health and life. An unfortunate event can derail the best laid plans, and inflation keeps making it more and more difficult to meet everyday expenses as well as healthcare costs. Between 2004 and 2014, for example, the average medical expenditure per hospitalisation for urban patients increased by about 2.7 times. For rural patients, it jumped by a little over 2.6 times. With over 80% of Indians being uninsured, this leads to a major challenge for someone who falls into this sorry situation. Needless to say perhaps, better be safe than sorry. Same goes for life insurance. It would be best to utilise your funds with discretion and opt for term life insurance plan from any reputed company – something that would annually cost a fraction of your monthly income.

Start investing 

If you are reading this far, or have already planned for the earlier actions, then congratulations, you are doing quite well. The fifth advice then, would be to start investing for the long term with a comprehensive financial plan for yourself – covering goals like retirement, tax planning, and other major life goals like buying a home, children’s education, family wedding, etc. Mutual funds are the simplest products for the common man for long-term goal planning. They offer the right combination of good returns, tax efficiency and liquidity, with expert management of your money by reputed companies and individuals, with appropriate diversification at a relatively low cost.  However, one needs to choose the right combination of investment across asset classes like equity (stock markets) and debt (fixed income products/ interest bearing bonds).

For that, one should get help from a qualified financial planner with expertise in advising customised asset allocation for your risk appetite and goal duration, who can also then recommend the best available funds for your investments.

Diwali bonus would be the perfect trigger to start savings towards your financial goals, if you have been postponing it for later. One often underestimates the power of starting early and saving for future goals. It is easy to see what difference it would make by starting to save early, through a simple example. Let’s say your friend Amit starts investing ?10,000 towards a monthly SIP in equity mutual funds, from the age of 35 till he retires, at say 60 years. In this situation, assuming 12% annualised equity returns, he will retire with a corpus of ?1.70 crore. On the other hand, if another friend Varun started investing earlier from the early age of 25, and invested just half the amount as Amit, that is ?5,000, towards a monthly SIP in the same funds and gets the same returns, he will retire at the age of 60 years with ?2.76 crore, much higher than Amit even with half the monthly investment. Would you rather be Varun or Amit?

So now that you have understood what exactly you could do with your Diwali bonus, you can decide how much you want to spend on the festivities, and how much you want to save. In summary, you should follow the pecking order below to spend your Diwali bonus in the most fruitful way, with a sixth advice thrown in as a bonus.

In a nutshell

• Develop the resolve to strengthen your financial position
• Clear your arrears and high-cost debt like credit cards/personal loans
• Set aside an emergency fund, with 3-6 months of regular expenses
• Buy adequate insurance for health and life
• Start investing for the long term with a comprehensive financial plan
• Go back to #1, and remember the quote by the legendary American investor Warren Buffet: “Do not save what is left after spending, but spend what is left after saving”.

The writer is CEO, Finaskus. The views expressed in this article are his own