A bonus hitting your bank account often feels like the perfect chance to reduce debt and get closer to financial freedom. For many, the instinct is immediate—use the extra money to prepay a home loan. But what if that decision, while seemingly responsible, actually puts you at greater financial risk? A chartered accountant’s recent post is now challenging this common belief, arguing that timing and sequence matter far more than the action itself.
Paaras Gangwal recently shared a scenario involving a 32-year-old named Rahul who had an outstanding home loan of Rs 25 lakh and received a bonus of Rs 3 lakh. Rahul’s first instinct was straightforward. He wanted to use the bonus to prepay part of his home loan, a move often seen as financially prudent. Reducing debt early can save on interest and bring a sense of relief.
However, a closer look at his overall financial situation revealed some gaps. He did not have an emergency fund in place. He had not taken term insurance. His savings were limited, and he had only recently begun investing.
Do not prepay loan
In such a situation, prepaying the loan might have felt like progress, but it could have created vulnerability. Without a financial buffer, even a single emergency—medical, personal or job-related—could force him to take on a new loan, possibly at a higher cost. Instead of going ahead with prepayment, Rahul took a different route.
Emergency funds
He first focused on building an emergency fund to cover unexpected expenses. This step ensured that he would not have to rely on debt during a crisis.
Term insurance
Next, he secured term insurance, adding a layer of protection for his dependents and overall financial plan.
SIPs
At the same time, he continued his systematic investment plans, allowing his money to grow over the long term rather than locking it entirely into loan repayment.
Gangwal’s broader message was clear. Financial decisions are not just about what to do, but when to do it. He highlighted that prepaying a home loan may not be the right move if key foundations are missing. These include having an emergency fund, adequate insurance and being in the early stages of wealth creation. The idea is to build protection first, then focus on growth, and only after that consider aggressive debt repayment.
Paaras Gangwal recently shared a scenario involving a 32-year-old named Rahul who had an outstanding home loan of Rs 25 lakh and received a bonus of Rs 3 lakh. Rahul’s first instinct was straightforward. He wanted to use the bonus to prepay part of his home loan, a move often seen as financially prudent. Reducing debt early can save on interest and bring a sense of relief.
However, a closer look at his overall financial situation revealed some gaps. He did not have an emergency fund in place. He had not taken term insurance. His savings were limited, and he had only recently begun investing.
Do not prepay loan
In such a situation, prepaying the loan might have felt like progress, but it could have created vulnerability. Without a financial buffer, even a single emergency—medical, personal or job-related—could force him to take on a new loan, possibly at a higher cost. Instead of going ahead with prepayment, Rahul took a different route.Emergency funds
He first focused on building an emergency fund to cover unexpected expenses. This step ensured that he would not have to rely on debt during a crisis.
Term insurance
Next, he secured term insurance, adding a layer of protection for his dependents and overall financial plan.
SIPs
At the same time, he continued his systematic investment plans, allowing his money to grow over the long term rather than locking it entirely into loan repayment.
Gangwal’s broader message was clear. Financial decisions are not just about what to do, but when to do it. He highlighted that prepaying a home loan may not be the right move if key foundations are missing. These include having an emergency fund, adequate insurance and being in the early stages of wealth creation. The idea is to build protection first, then focus on growth, and only after that consider aggressive debt repayment.
