Few would choose to spend their entire salary on a shopping spree or an extravagant night out. Responsibilities like bills, loans, and providing for family often take precedence. On the other hand, a year-end bonus is often perceived as unexpected good fortune, a recognition of one’s diligent efforts, and an opportunity to indulge without constraints.
Is it really true though? Your bonus is part of your earned wages for the year, and all bonuses received (be it your 13th-month bonus or performance bonus) are taxable.
The question arises: should one treat a bonus differently relative to typical salary earnings?
Rather than spending your entire bonus recklessly, consider devising a structured plan to allocate it strategically in alignment with your long-term financial goals. Set aside a sum to savour the rewards of your hard work, while you make the most with the remainder. Here’s a guide on how to maximise its impact.
Prepare for a rainy day
If you haven’t established an emergency fund equivalent to at least three to six months of your net income, consider allocating a portion of your bonus to build up your fund.
Having a safety net can help cover unexpected events like a job loss or medical emergency too, without the need to incur deeper financial debt.
Clear debt
If you’re still grappling with the interest on last year’s credit card bill, consider using some of your bonus to cover that debt. Credit cards often come with high-interest rates and clearing off this outstanding amount can alleviate the burden of accumulating interest.
Moreover, if you are in debt with similarly high interest rates, using your bonus to reduce these balances can help bring your overall debt to a more manageable level.
Beat inflation
If you have set aside your emergency fund and carry no bad debt, consider using your bonus to kickstart your investment journey and hedge inflation.
Money idling in the bank may be losing its purchasing power as inflation takes effect. One way to beat inflation is to invest in the stock market.
Historical data suggests that stock market returns have consistently surpassed the rate of rising prices. While it’s crucial to note that past performance doesn’t guarantee future results, studies, such as those by Goldman Sachs, indicate an average 10-year stock market return of 9.2% over the past 140 years.
To maximise your bonus, follow Warren Buffet’s recommendation and diversify your investments into a portfolio of low-cost exchange-traded funds (ETFs). Using Syfe, you can do just that. Fees start as low as 0.025% for ASX trades and US$1.49 for US Trades, making it affordable and accessible to anyone looking to get started in investing.
Invest in yourself
Spend a portion of your bonus towards your most valuable investment – yourself. Consider investing in a high-quality suit or dress that aligns with your professional environment and instils confidence whenever you wear it.
Think into the future
Put aside a portion of your bonus to proactively save for projected expenses in the future. Whether it’s a family vacation or home renovations, setting aside your savings now will set you in the right direction towards achieving your financial goals.
Give yourself a pat on the back
Even though your bonus may seem like a windfall, it’s crucial not to treat it as such. Instead, save and invest that amount wisely. You can start by finding out which portfolio is right for you.
By making wise investments now, you can lay the foundation for financial rewards that will manifest years later, allowing you to truly enjoy your retirement.
