Diwali bonus: Spend, repay loans or invest? Here's how to decide

Diwali bonus in hand? Before spending it all on shopping and celebrations, find out how to divide it between festive expenses, high-interest debt, emergency savings and investments. Experts explain how to make your bonus work for you without compromising your financial goals.

The temptation to spend is understandable. Diwali comes only once a year, and there are plenty of reasons to make the most of it. But the bonus can also be an opportunity to reduce expensive debt, build emergency savings or invest towards long-term financial goals.

The key is to decide how much to spend before the money gets used up. There is no single allocation that works for everyone. Someone carrying credit card dues and having no emergency savings will have different priorities from a person who has already built a financial cushion and has manageable EMIs.

"The exact proportions still depend on circumstances," he says.

Someone with no outstanding debt can put more towards investments, while a person carrying credit card dues may need to direct a larger share towards repayment.

How much should you spend on Diwali?

Diwali spending is not just about shopping. Families may want to buy gifts, new clothes, home decor or travel to meet relatives. The idea is not to avoid spending altogether, but to decide how much the household can comfortably afford.

A fixed budget can help prevent festive expenses from increasing with every shopping offer. Listing priorities before shopping begins also makes it easier to decide what can be postponed.

Subhendu Harichandan, Executive Director at Anand Rathi Wealth, suggests that around 40% of the bonus can go towards festive spending, provided the investor has adequate insurance, an emergency fund and no high-interest debt.

"If these requirements are not met, the festive spending allocation should be reduced accordingly," he says.

For someone who has expensive loans or no emergency savings, spending 40% of the bonus on celebrations may not be the best starting point.

The amount should depend on the household's financial position and upcoming expenses.

For example, someone receiving a Rs 50,000 bonus can decide in advance how much to spend on gifts, clothes, food and family celebrations.

These amounts are only an example. A household can change the allocation depending on its priorities.

The important thing is to stay within the overall budget. If spending on gifts increases, the amount available for clothes or other purchases should come down instead of increasing the total festive bill.

Should you clear loans before investing?

For people carrying credit card dues, personal loans or other expensive borrowing, debt repayment may offer a more immediate financial benefit than starting a fresh investment.

Credit card outstanding is particularly important because interest can accumulate quickly if the full bill is not paid. Personal loans and app-based loans can also carry high borrowing costs.

Shetty says clearing high-interest debt should usually take priority over investing.

"Credit card interest in India typically runs between 36% and 48% a year, a cost most investments cannot reliably beat," he says.

A useful way to decide is to compare the interest rate on the loan with the realistic return an investment could earn. If the borrowing cost is higher, paying down the debt generally makes more sense.

For example, suppose someone receives a Rs 50,000 bonus and has Rs 30,000 in outstanding credit card dues.

Using Rs 30,000 to clear the dues can reduce the amount on which future interest is charged. The remaining Rs 20,000 can then be divided between festive spending, emergency savings or investments.

The actual interest saved will depend on the card's outstanding balance, interest rate and repayment terms.

The priority should also depend on the type of borrowing.

The table is a broad guide. The actual interest rate and loan terms matter more than the name of the loan.

A person paying regular home loan EMIs comfortably may not need to use the entire bonus to prepay the loan. But someone struggling with expensive credit card borrowing should consider clearing that debt before putting a large amount into fresh investments.

What if you do not have an emergency fund?

The bonus can also help households build a financial cushion.

An emergency fund is meant for expenses that cannot be planned in advance, such as a medical bill, job loss or urgent home repair. Without one, a household may have to borrow or sell investments at an inconvenient time.

Shetty says an emergency fund should usually cover around six to nine months of essential expenses and remain easily accessible.

"Without it, an unexpected expense such as a medical bill or job loss can force an early exit from an investment or costly borrowing," he says.

For someone starting from zero, the Diwali bonus can be a useful first step towards building this reserve.

The amount needed will depend on monthly household expenses.

These are target amounts, not money that must be accumulated immediately.

Someone receiving a Rs 50,000 bonus and having no emergency fund can use a portion of it to begin building the reserve. The remaining amount can be allocated according to other financial needs.

Harichandan says emergency savings should take priority when the household does not have an adequate financial cushion. However, investors do not necessarily have to wait until the entire emergency fund is built before starting their investment journey.

He suggests keeping emergency money in an accessible savings account or fixed deposit and investing the remaining amount towards financial goals.

For example, someone who can save Rs 15,000 a month may allocate Rs 7,500 towards building an emergency fund and invest the remaining Rs 7,500 through a SIP in diversified equity mutual funds.

Once the emergency fund is adequate, the amount going towards it can be redirected towards long-term investments.

The important point is to keep emergency savings separate from money meant for investments or festive expenses.

Home loan prepayment or mutual funds: Where should the bonus go?

For households that have cleared expensive debt and have adequate emergency savings, the next decision may be whether to prepay a home loan or invest the bonus.

A home loan generally carries a lower interest rate than credit card borrowing and is repaid over a longer period. The decision to prepay or invest depends on the loan's interest rate, remaining tenure, tax benefits, investment horizon and the investor's comfort with market risk.

Shetty says the decision comes down to comparing the home loan interest rate with the likely, but not guaranteed, return from investments.

Someone early in the loan tenure may benefit more from prepayment because a larger part of the EMI goes towards interest.

Harichandan says a home loan should not be prepaid simply because an investor has received a bonus.

If the borrower has cleared high-interest loans, built an emergency fund and can comfortably manage monthly EMIs, investing towards long-term financial goals may also be considered.

For example, he says someone with a home loan carrying an interest rate of around 8% may consider investing the bonus in diversified equity mutual funds if the financial conditions are in place.

He gives the example of a Rs 5 lakh investment growing to around Rs 15.5 lakh over 10 years, assuming an annual return of 12%.

This is an illustration, not a guaranteed return. Mutual fund investments are market-linked, and actual returns can be lower or negative, particularly over shorter periods.

The comparison with home loan prepayment should also account for the loan's actual interest cost, remaining tenure and applicable tax benefits.

The decision may look different for someone whose EMIs are putting pressure on monthly finances.

There is no need to choose between prepayment and investing purely on the basis of which option appears to offer a higher return.

The household's financial position and the time for which the money can remain invested should guide the decision.

How should you divide a Rs 50,000 Diwali bonus?

The two experts offer different allocation approaches.

Shetty suggests roughly dividing the bonus into three parts for festive spending, debt repayment and longer-term goals.

Harichandan suggests a 40:40:20 allocation, with 40% towards investments, 40% towards festive spending and 20% towards debt repayment or emergency savings.

But neither approach should be treated as a fixed rule.

A household with expensive debt may need to reduce festive spending and direct more money towards repayment. Someone without an emergency fund may need to build savings before investing a large amount.

The following examples show how the same Rs 50,000 bonus can be divided differently.

These are illustrative allocations, not prescribed percentages.

The last column can be divided between emergency savings and investments depending on whether the household already has an adequate financial cushion.

For someone with both expensive debt and no emergency fund, the bonus may need to be used mainly for repayment and building a basic reserve. For someone who has already taken care of these priorities, a larger share can go towards investments or home loan prepayment.

The bottom line: Enjoy Diwali, but give your bonus a purpose

A Diwali bonus does not have to be spent entirely on celebrations or invested entirely for the future.

The best use depends on what the household needs most.

Someone carrying expensive debt may benefit more from repayment. A household without emergency savings may need to build a financial cushion. Those who have both in place can consider investing towards long-term goals or prepaying a home loan, depending on their financial position.

The important thing is to make the decision before the bonus gets used up. Enjoy the festival, but make sure the bonus also works for you after Diwali is over.

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