What should you do with your annual bonus – save or spend?

Sharmin Adhikari is 35 years old and an interior designer by profession. She is thrilled about her annual bonus and the extra cash she has received, especially during the vacation season. She is tempted to splurge on a dream European cruise with her husband, but also feels the need to save. Torn between indulgence and prudence, she is weighing her options and wants to know what to do.

Sharmin Adhikari should start by clearing her outstanding debts. She should begin with credit cards, followed by personal, car and home loans, in this order. Credit cards carry the highest urgency, with interest rates reaching up to 36% annually. While using the bonus to pay off debt is technically spending, it leads to significant monthly savings by cutting down future interest costs. Once the debt is under control, her next priority should be to build an emergency fund, if she doesn’t already have one.

If Adhikari has already tackled her high-cost debt and has built an emergency fund, she can consider splitting her bonus between saving and spending. After all, she has earned it, and a small, thoughtful indulgence can be a rewarding way to celebrate.

Choosing something that offers lasting value, like a short, affordable holiday, may be more meaningful than splurging on a bucket-list cruise. The rest of the bonus could be set aside for upcoming expenses, such as home repairs, new car, or a short course, or added to her long-term savings for goals like retirement.

The things that Adhikari could do with her bonus could be endless. The decision on what to do with a bonus cheque doesn’t always have to be a choice between saving and spending. The only caveat is her financial situation. In case there is a debt or a major expense looming, the money might be best saved.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.