Everyone can relate to that feeling of excitement when receiving a bonus and all of a sudden, you feel that your financial problems have come to an end.
However, after a month or two, not many can account for how the money was spent, it seems to disappear with every other money that comes into the bank account (i.e. regular earnings).
It’s that time of the year again when most companies will soon start announcing their financial results and employees can expect to receive communication on bonuses.
Most bonus payments these days are performance related so if you receive one, it comes with a feeling of success and fulfillment that your hard work is finally being recognized.
Regardless of how much you are expecting to receive, it is important to carefully plan how you’ll spend it so that you can receive the most value out of it. Proper planning will ensure that you are able to account for every penny that comes in and motivate you to work even harder towards the next bonus.
So how can you really maximize your bonus?
First and foremost, you need to reward yourself for all the hard work. You have worked hard all year, dedicated your time and talent towards your company, and fully earned the bonus so you deserve to celebrate and treat yourself.
Splurge on that expensive item that you’ve always wanted to buy or indulge in your guilty pleasure without feeling guilty for once.
However, keep this to 10% – 15% of your bonus earning and try not to go over the threshold in order to fully maximize the amount.
If you are a parent or working mother, you might feel the need to also spoil your family. Why not? They have supported you all year and been patient with you on those days when you’ve had to work late nights or work away from home so they also deserve to be rewarded.
Spend about 5% to 10% on the family and kids and buy everyone lovely gifts to appreciate them for their support towards your achievement.
Consider allocating the remaining 80% of your bonus in the following order:
1. Pay off any debts that you owe
The cost of servicing debts is going to be higher than any income you are likely to receive on savings or investments.
Except if your debts are non-interest bearing with no repayment commitments, it is more effective to pay off your all your debts before you think of saving or investing your bonus earnings.
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2. Put money into long-term savings or investments
Any money left after you have cleared your debts should go into your long-term savings or investments.
- On average you should be putting 10% to 20% of your normal earnings into long-term (or retirement) savings or investments options on a monthly basis, so if you can, try to spend at least 10% to 20% of your bonus earnings in the same manner. The money can go towards your pensions, ISAs, other long-term investments products or even your personal business venture.
- This money is important for securing your future in the days when you don’t have the energy to work as hard as you are working now. Just as the saying goes to ‘make hay while the sun is shining’. If you have not already started saving and investing towards your future, then maybe you can start with your bonus this year.
- It’s never too late to start and $1 invested today can go a long way in the future with compound interest.
3. Top up your short-term savings or emergency fund
If you still have money left after saving for the future, then you can use it to top up your short-term savings. This is the money you put aside for the short term emergency spend that you don’t plan for (i.e. unforeseen events) or the rainy day.
Naturally, you should already be putting aside at least 10% of your regular earnings towards this account to cater for the unexpected spending commitment. The recommended practice is to have about three months of income in your emergency account as a minimum.
Anything left can go into your miscellaneous account towards your next holiday or luxury spend savings (to fulfill your ‘wants’).
To conclude, the bonus is a special earning that you’ve worked for and it’s important to treat it differently from your regular earnings.
A fully maximized bonus is more memorable and being able to account for every amount makes it feel even more rewarding. A financial planner can assist you with savings and investments options that suit your goals, life commitments and risk profile (capital at risk). Good luck with the announcements.
Hope you smile to the bank by getting a bonus payment that rewards all your hard work over the last year.
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