Received Cash Gifts This Diwali? Here's What You Can Do with It…

Last weekend, I met a few of my friends for post-Diwali shenanigans. While we all were chit-chatting about our Diwali celebrations, my friend Rohini said, "Guys, I have received many cash gifts this Diwali from my family member, and I am confused about how to use all this money whether to shop from my favourite brands or save." To which Tejas added, "You know, I have received a Diwali bonus from my workplace, and it's my first festive bonus. I have planned to make a down payment for the new iPhone 14 with this amount, and rest I will take a loan EMI."

After listening to them, I asked, "Don't you guys think instead of spending the entire bonus and cash gifts on such short-term materialistic desires, you should be looking for investment opportunities that benefit you in the long term and assist you to build a wealthy corpus for a better financial future?"

To which my friend Sahil responded, "Since we discussed the same last year, I agree with Mitali. You know, instead of investing wisely, I was about to splurge my entire festive bonus and cash gifts on needless things. So, Rohini, based on my experience, I believe we could make better use of the money you received instead of splurging it all on branded clothes. If the gift card is for a certain brand or retailer, however, you may use it since there is no other purpose for it. And Tejas, my friend, while I do understand your desire to purchase a new iPhone, you should re-evaluate your need for it and your financial capacity. Please be aware that if you take out a loan with an EMI option, you may end up with a debt burden."

To which I replied, "As Sahil rightly said, it is easy and tempting to spend all your festive money on materialistic desires; millennials especially have a mindset for instant gratification, which leaves them with a lack of savings and delay in wealth creation. However, if you want to keep your financial situation in good shape, you must practice delayed gratification. You must take the opportunity to invest wisely with the money you received during Diwali into several worthy investment to secure your financial future."

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

No matter the amount of your Diwali bonus and cash gifts, huge or small, with effective financial planning you can make the most out of it. Let me guide you with few smart ways to utilise your festive bonus and cash gifts.

1. Invest in Mutual Funds

Let this Diwali be your auspicious start to begin your wealth creation journey. Your first step could be investing in mutual funds as per your suitability based on your risk profile, investment horizon and objectives. Mutual funds can earn good returns in the long term and are ideal for wealth creation.

It is never too late to start investing a small amount towards your envisioned financial goals, such as buying a dream home, children's education needs, their wedding expenses, and your own retirement, etc. You may consider a Systematic Investment Plan (SIP) while investing in mutual funds as it is lighter on your wallet and benefits from the power of compounding and rupee cost-averaging.

[Read: 5 Key Benefits of Investing in Mutual Funds via SIP]

Considering the current high market volatility investing via SIP in mutual funds will be a good option. Equity mutual funds are known to offer you better risk-adjusted inflation-beating returns in the long run. But don't rush to invest in this overheated market; ensure to choose worthy mutual fund schemes. For instance, you may invest the cash gift in an equity mutual fund scheme. Begin with an SIP with as low as Rs 500 per month; this will instil a good financial habit of investing regularly in a systematic manner. This is one of the ways you could utilise your cash gifts.

Moreover, if you still have not made any tax-saving investments for the financial year, you can invest in a tax-saving ELSS (Equity-linked savings scheme) mutual fund. In addition, if you have already been investing, increase your existing investments this Diwali. Consider a Top-up SIP option for your ongoing SIP for a long-term financial goal; you can invest an additional amount into the same fund. This can give a boost to your existing SIP investment and help you reach your financial goals faster.

2. Build Your Emergency Fund

Many of us may find it difficult to set aside a specific amount from our monthly salaries to build an emergency fund. This is where your Diwali bonus and cash gifts can help you. It is wise to be financially prepared to weather any storm in future and sustain through financial difficulties, and an emergency fund serves the purpose.

Ideally speaking, one should have an emergency corpus equal to holding 12-24 months of expenses, including loan EMIs. This can act as a safety net for you and maintain your financial stability in times of need. You could choose to park that money in relatively less risky liquid funds as it would offer you slightly better returns than your savings bank account. This investment can be used to build your emergency fund. If you already have set up an emergency fund, you may add the surplus amount to boost up your emergency fund. It will have enough corpus to serve you in uncertain events.

3. Pay off Your Existing Loans

A great way to use your Diwali cash gifts and bonus is to pay off and close any existing high-cost loans. You can start by clearing outstanding credit card dues or car loans or even personal loans if any, and then move on to other debts like home loans.

Paying off your loans, especially the ones that charge a higher rate of interest, can make your financial life easier and will also help in enhancing your credit score. This will help enhance your creditworthiness and maintain your debt-to-income ratio below 40%, which will get you access to avail loans in future in times of need. However, do check if the lender charges on prepayment of the loan. By reducing debt you would be in a position to save more and invest it wisely in rewarding investment avenues.

4. Purchase an Insurance Cover

Another interesting way to invest festive cash gifts is by purchasing adequate life insurance and health insurance coverage. This will help you secure your and your family's financial future. Most of you, especially millennials, may be reluctant to purchase health insurance coverage at a young age to avoid paying the premium costs.

However, do note that a medical emergency can come knocking at your doorstep at any moment, and the hospitalisation costs can be far more than the premium cost of a health insurance plan. Hence, getting a health insurance plan for yourself and your loved ones is a must-have.

With increasing uncertainty in life, having a life insurance cover is essential as it protects you from sudden expenses in challenging times. Life insurance cover will assist your family to fulfil their financial obligations in your absence (unfortunate demise) and maintain their financial well-being. Now is the time if you have not purchased a life and health insurance policy. You may also consider gifting an insurance cover to your loved ones as a financial gift. Remember, you have to ensure the terms and conditions of the insurance policy before purchasing for easy access to claims.

5. Begin Your Retirement Planning

You must be thinking it is too early to plan for your retirement. However, one aspect that must consider meticulously is the earlier you start, the better it is post-retirement. After retirement, when your monthly income is dependent primarily on what you save today, it is important that you must plan it well from now so that you don't face any cash inflow issues in your golden years.

Do not depend on your children in future or anyone for your retirement, build a retirement corpus for yourself as soon as you get the opportunity. Your Diwali bonus and cash gifts will give you a perfect start to begin with, your retirement planning. Apart from a National Pension Scheme or Public Provident Fund, you may also consider investing in worthy mutual funds, as they will help you generate inflation-beating returns over the long term. The sooner you start, the more you can leverage the power of compounding and make your money work for you.

[Read: Retirement Calculator]

Additionally, you should emphasise enhancing your financial knowledge as well and consider investing in yourself rather than splurging on your immediate needs. If you are financially literate, you will better understand how to utilise the surplus money that you may receive on any occasion and how you can improve your financial well-being.

You may consider using a portion of your bonus or cash gifts to purchase financial books, or in this fintech world, it is easier to enhance your financial knowledge on your fingertips by enrolling to an online e-course that guides you towards improving your money management skills and explain the nitty gritty of financial planning. Being financially literate will assist you to help you make informed financial decisions. Therefore, the best way to use your bonus and cash gifts is to invest it in various opportunities that will help you protect your financial future.

PS:  We at PersonalFN understand that not everyone holds financial knowledge. Here we encourage you to gain and enhance your financial knowledge and become a 'Financial Guardian.' You will understand the financial planning elements to become your own financial planner.

And in case you are wondering how to become that financial guardian for your family, PersonalFN's latest special initiative, the "Certified Family Guardian," offers you an exclusive opportunity to learn the finer nuances of money management.

Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management. It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details...

So, if you wish to brighten up your financial future this Diwali, you must enrol for the "Certified Family Guardian" programme today!

Happy Investing!

Warm Regards,
Mitali Dhoke
Research Analyst