By Fred Wagenvoorde
Knowing how to make the most of your year-end bonus is crucial for your financial well-being. In this article, we'll explore the dos and don'ts to make sure you capitalise on this income wisely.
What to do with your bonus:
1. Pay down high-interest debt: If you're carrying high-interest debts like credit cards or loans, using your bonus to chip away at these balances can save you a significant amount of money in the long run. By reducing your debt load, you'll not only save on interest payments but also improve your overall financial health and free up more cash flow for other expenses or savings goals.
2. Boost your emergency fund: An emergency fund serves as a safety net to cover unexpected expenses like car repairs, medical bills, or job loss. Having a solid emergency fund can help prevent you from relying on costly credit cards or dipping into investment savings during difficult times. Set aside a portion of your bonus to build or replenish your emergency fund, aiming for at least a minimum of three months’ living expenses.
3. Contribute to your Retirement Fund or Tax-Free Savings Account: Not only are you investing the bonus, but you are also investing it into tax-efficient vehicles for retirement. This can significantly boost your retirement savings and help you reach your long-term financial goals.
4. Treat yourself – within reason: Don't deny yourself the joy of enjoying your bonus. Financial planning done right and early should be balanced between saving and spending. Allocate a portion to treat yourself to something you've been wanting, like a weekend getaway.
Remember to keep it within your means and avoid overspending, as your bonus should not derail your overall financial plan.
5. Invest for the future: If your financial situation is stable and you're not facing immediate financial obligations, consider investing a portion of your bonus.
What not to do with your bonus
1. Spend it all at once: Resist the temptation to spend your bonus on impulse and/or expensive purchases. Avoid lifestyle inflation, which sets a lifestyle standard you may not be able to manage and stick to your budget. Instead, approach your bonus as a valuable financial tool to achieve your long-term goals.
2. Borrow against your bonus: Avoid taking out loans against your bonus to fund non-essential expenses. This will only add to your debt burden and make it harder to reach your financial goals.
3. Ignore your budget: Don't use your bonus as an excuse to abandon your regular budgeting habits. Continue tracking your expenses and allocating your income wisely. Your bonus is a bonus, not a replacement for your regular income.
4. Make unrealistic investment decisions: Don't get overly ambitious with your investment choices just because you have a lump sum of cash. Stick to your risk tolerance and invest in assets that align with your financial goals and risk profile.
* Fred Wagenvoorde is a financial planner at Fiscal Private Client Services.