How to use your annual bonus to speed up wealth creation

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Many salaried people receive a major part of their CTC (cost-to-company) as an annual bonus. A good six-figure annual bonus can go a long way when it comes to building wealth. Usually, big annual bonuses tempt one to go on a binge spending. But one should refrain from indulging in such type of spending. Rather one should use their annual bonus in such a way that it grows your long term savings faster. Here are some wiser ways to use your annual bonus:

  • Top up your existing SIP

The best way to invest your annual bonus is to make a lump sum investment into your monthly SIP (Systematic investment plan). As equity markets are at an all-time high level right now, you can invest the amount in a liquid fund and then set up an STP (Systematic Transfer Plan) so that a fixed amount goes into your existing monthly SIP every month and you can avail the benefits of rupee cost averaging. This type of investment has the probability to speed up the process of long-term wealth creation.

  • Start a new SIP

Our expenses tend to increase with the increase in our income, we need to hike our savings every year so that it grows into an amount that can get you a subsidy income, matching your post-retirement monthly expenses. So, you can start a new SIP by putting the yearly bonus amount in a liquid fund and then setting up an STP from that liquid fund to an equity fund of your choice.

  • Lump-sum investment in ELSS

You can also invest some part of your annual bonus as a lump sum investment in an ELSS (Equity-linked saving scheme) fund so that you can avail the tax benefit under Section 80C and your investment grows faster than expected.

  • Pay off high-cost liabilities if any

High-cost liabilities like credit card loans, personal loans, can be paid off using your annual bonus. Paying off high-cost loans will strengthen your financial position.

  • Buy health/term/single-premium ULIP

If you have not taken an appropriate financial decision regarding health or term insurance for your family then you can use your annual bonus to increase your health/term insurance cover. Also, you can invest in single-premium unit linked insurance plans. ULIPs allow investors to continue with long term investment, which is a healthy financial approach.

ULIP benefits to those who want to start early to ride on the equity advantage. Long-Term investment plans can also help to get better and more stable ULIP returns. The attractiveness of ULIPs has increased after the imposition of LTCG (Long term capital gains) tax on equity mutual fund returns. The maturity amount of a ULIPs is exempted from capital gains tax under Section 10(D).