Rishi needs to ask himself whether this money was accounted for when he had drawn up his budget and savings plan. If he had, then he should just stick to the plan and not consider the bonus money as extra. If it is indeed an additional unexpected income, then he must evaluate his options and decide what he wants to do. While he is making the decision, it will be a good idea to move the money into a liquid fund, so that it is not spent randomly.
Prepaying an expensive loan will help him save on interest costs and free his regular income from the EMI obligations. However, before considering prepaying a portion of the home loan, he should look at retiring credit cards and personal loans which carry a higher interest rate. If he finds his current job risky and since the pandemic is not over yet, he may like to keep his loans low.
Rishi should use a portion of his bonus to catch up with his investment plan, in case he has fallen back. Since he has been disciplined in making his planned investments, it would be a big motivator if the money helped him reach a goal he has been looking forward to. Using the money to hasten a goal for which savings are already being made, is a good idea and acts as a reward. But using it to initiate the purchase of a car with a loan, will only expand his monthly expenditure with the additional EMIs, which should be avoided.
While making a decision, he should simply ask himself if the allocations he is considering would have a positive impact on his financial situation. The outcome should be something that he can identify as the result of the bonus he earned. This will help him make the allocation that he will be happy with.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)