It’s that time of the year where employees can expect (or rather secretly hope) to receive extra income. It could come from annual bonus, increment or in terms of salary arrears. This is also the period wherein people change jobs after getting an increment in hopes of increasing their income by 30%-40%. Irrespective of the source of the increased income, it is wise to have a plan on how to utilize this money in the best possible manner.
Most individuals may spend the extra cash on luxury items like car or expensive electronic gadgets. Heed Warren Buffett’s wisdom and be careful with your expenditure. His advice is, “Don’t save what is left after spending. But spend what is left after saving”
In this spirit let us look at what are the ways employees can use their extra income:
1. Protect your health
I. Buy Term life insurance – make sure that your life is covered at least 5x your current income. You can easily go and buy term plans from several insurers. Do not mix term life with investment schemes. Instead opt for pure term life cover. Buying term life insurance when you are young is highly beneficial as the premium remains is lower and remains unchanged throughout the term of the policy
II. Buy health insurance if you do not have one. Remember that if your company is buying health insurance for you, the moment you leave the company, that insurance policy no longer stays valid. It is good to build your own reputation with a health insurance provider. You may know that most health insurance companies will have a lot of items that will be exempt from insurance claims for the first 2 years. After 2 years the policy is fully paid and you can get full benefits of the policy.
Never let your money lie idle. As Buffett states, use your money to build more money. Invest your money wisely and according to your risk appetite,. You can invest in stock markets (high risk, high returns), mutual funds (moderate risk, moderate returns) or low risk, fixed returns options like PPF, RD or FD. Ideally you should balance your investments so that while you anticipate returns from your stocks and mutual funds (minimum lock-in period of 3 years), you can also withdraw funds from your fixed deposits in case of emergencies.
3. Pay off your debt:
Paying off your debts and loans should be one of your highest priorities. These would include your credit card bills, car loan, personal loans, etc. They have a high interest rate and the sooner you pay them off the better. Although, not all loans need to be paid off immediately. Your education loan and home loan have tax benefits so it’s recommended that they continue.
4. Invest in yourself
Invest in courses that increase your knowledge or opt for higher education. Learn skills that can give you an edge over your competition. Basically you should be consistently focusing on developing yourself.
5. Plan your taxes wisely:
While there are various ways for you to utilize your money, know that whatever bonus you get, in addition to your regular income, is also taxable. So make sure that you plan your taxes wisely. Apart from spending on core necessities, make investments that are exempt from taxes under the Income Tax Act.
6.Don’t forget to treat yourself:
And lastly, don’t forget to treat yourself. You worked hard for the money so you are allowed to spend some of it on leisure and enjoyment. In fact it helps to rejuvenate yourself once in a while allowing you to resume your work with renewed vigour.
It is important that all these investments and expenditures are considered before filing taxes. If they are not declared or incorrectly calculated, employees may end up paying more taxes without being aware of the exemptions allowed under the Income Tax Act.