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Once again, the festive season (October to December) is upon us. Bonuses have probably been handed out or are around the corner and malls and shopping areas will soon be decked with sales and attractive offers. Online shopping has already gained momentum as e-retailers have dropped prices to increase their sales pitches to attract eye-balls and before we get to see the current news in newspapers, we have to first go through full page offers by online e-retailers. At a time like this, it is easy to get carried away and make financial decisions that we may regret later.
So, here’s what one can do to ensure that this festive season, both spending and investing decisions are well planned and result in optimal cheer:
Towards avoiding excessive or impulsive spending:
1. Avoid using credit cards:
Rather than using your credit card, pay for your purchases in hard cash or by your debit card. It gives one a sense of reality as one feels the hit instantly and is therefore more likely to keep one’s spending under control. On the flip side, one tends to splurge while spending on a credit card due to the available credit limits. In case you do use your credit card, pay all your outstanding dues on time rather than only the minimum amount due; remember, the balance amount attracts steep interest costs, which can, in extreme circumstances, lead to a debt trap. Credit card borrowing is one of the most expensive methods of funding.
2. Form a consensus within the family on what must be purchased and set up a budget accordingly:
While in a festive mood, it is easy to get carried away and spend generously on every member of the family and the house and neighbors, friends and other loved ones as well. However, sitting down with the family and setting out spending priorities that fit within a predetermined budget can go a long way to ensuring that you do not suffer from the ‘morning after’ syndrome.
Further, every member within the family may have different needs and desires. Hence, it is very important to distinguish between needs and desires in each case. Set a budget for different expenses and stick with it; don’t get carried away with attractive offers and festive sales; purchase only what you need and only if it fits within your budget.
Towards putting your bonus to good use:
1. Shed some of your debt burden:
In case you are servicing any liabilities or are in debt, use your bonus to effectively re-pay or pre-pay your debt to whatever extent possible. In the long run, being debt free is one of the best gifts you can give yourself and your loved ones.
2. Build a contingency fund:
You could also use your bonus to build or top up a contingency or emergency fund, in case you do not already have an adequate one. Such a fund will come in very handy in case of unpredictable and untoward events like medical emergency, loss of regular income, etc., for which you do not have insurance cover. The thumb rule is to have an amount that is at least equal to 3 to 6 months’ of your monthly income. However, this amount could be different for different people and depends on one’s unique financial and social situation. To make the most of your emergency fund, invest it in a liquid or Ultra Short term fund, which is expected to give a better return (approx.7 to 7.5% p.a.) than a savings bank account.
3. Purchase adequate insurance:
There are various ways to gauge how much life insurance you need. The most basic rule of thumb is to have insurance cover which is 8 to 10 times your gross annual salary. Use your bonus to ensure that you are adequately insured. It could be the best gift you could give your loved ones in the event of an unforeseen eventuality.
4. Invest/ Plan for long term goals:
Once you have adequately managed your risks through suitable insurance and an emergency fund, you can look at investing for your financial goals. Start investing to achieve your future financial goals such as your child’s education, buying your dream home or car, etc. This will give you much greater satisfaction in the long run than spending on some unplanned festive shopping binge as it will help you to achieve your goals in advance.
Conclusion:
Ideally, split your bonus into two distinct parts – one for long term goals, a contingency fund and insurance, etc. and the other for festive spending. Make sure that the first part is executed as planned then enjoy the second part.
Reference : http://www.moneycontrol.com/
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