How to spend your bonus

A friend of mine would often comment on how she would wait for a bonus or windfall to 'live it up.'

When I asked her what stops her now, her response was, "I prefer blowing up money that is not regularly earned."

I am still not sure what she meant, but I think it is obvious that -- depending on where it comes from -- she segregates money in her mind.

Just because you get it unexpectedly or without working for it, don't undervalue or undermine your money's worth. Money is money.

It could be an inheritance, a gift from a rich relative, a bonus you were not expecting, a great return from some shares or mutual fund investment or maybe a tax refund. It could even be a lottery or a winning in a television game/ reality show.

Whatever be the source of the profit or windfall, do not gamble it all away or splurge. Here are some ways on managing an unexpected windfall smartly.

Don't take a risk with all of it

A friend of mind once made Rs 1,50,000 as profit from selling shares. This was during the peak of the current bull run. He wanted to live dangerously and reinvest the entire amount. His mentality -- it was easy money so why not play around with it.

But his father kept cautioning him. He advised him to invest just Rs 50,000 in the market again and put the balance Rs 1,00,000 in 'safe options' like the National Savings Certificate or Public Provident Fund.

When he told his father he would do that with his salary income, his father suggested RBI bonds.

Finally, my friend succumbed. He agreed to put Rs 50,000 in RBI bonds but re-invested the rest (Rs 1,00,000) in the stock market.

Maybe you can settle your debt

An unexpected windfall is a great way to clear your loans. This will give you peace of mind and help you save on interest in the long run.

The first type of loans you should look at clearing are those with the highest interest rate and no tax benefit, especially if you are servicing a personal loan or credit card debt. These loans are the most expensive and the rates of interest are in the 18% to 30% per annum category.

Instead of spending your monthly earnings on paying interest on these loans, it would be better to clear it up.

Also clear your auto loan. Education and home loans offer a tax benefit so they should be considered last.

If you do not have any of the above loans, check and see if you owe someone money, a friend or relative. While it may be interest-free, it is not morally right to keep their money.

Look for expenses that have been put on hold

Don't blow it all up. Have you been genuinely saving for something?

Draw a balance between your needs and wants.

Are you saving for a particular goal like an upcoming wedding? Or are you saving for the down payment of a home? Channelise this money towards that end. These are needs that will put pressure on you later.

What about your wants? Saving for a home theatre system? Renovation of your home? This money will come in handy.

Of course, the time frame too will come into play. If you want to buy a home theatre system now but planning a wedding five years down the road, the former will win.

To sum it up, put your windfall to use in the same way you would put your earnings to use. Don't change your attitude towards money. This way, you ensure you get the best from your money.

So tell us dear reader, how would you spend your bonus or windfall?