Very few people would take their entire paycheck and spend it all on a three-week Europe tour. After all, there are bills and loans to be paid, and mouths to be fed. But a year-end bonus feels like a windfall, a reward for all the hard work you put in – and an invitation to splurge as you wish.
But is it really? 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. Should you then be treating money from your bonus that differently compared to money from your paycheck?
Instead of splurging all of that bonus, make a plan to allocate it wisely in line with your long-term financial goals, while still setting aside some money to enjoy the fruits of your labour. Here’s how to make the most of it.
Prepare for a rainy day
If you don’t yet have an emergency fund containing at least three to six months of your take home pay, use a part of your bonus to beef up your emergency savings. As the trade war pendulum continues to swing, the economic outlook for Singapore in the year ahead is still uncertain. Having an adequate savings buffer can help cover unexpected events like a job loss or medical emergency.
Pay down debt
Still paying the interest on last year’s credit card bill? Use your bonus to pay that off. Credit cards have some of the highest interest costs. If you pay just the minimum sum on your credit card bills each month, you could be paying up to 24% annual interest on your outstanding amount, and on any interest not settled by the next payment date. If you have other debt that carries high interest rate charges, your bonus can also be used to bring your debt down to a manageable level.
Invest for your future
If you have set aside your emergency fund and carry no bad debt, your bonus can be a great way to kickstart your investment journey. According to the Syfe Retirement Readiness Index (SRRI) report, Singaporeans are largely still savers with 43% of all assets held in savings accounts. The SRRI report also found that investing could significantly boost one’s retirement readiness.
To maximise your bonus, follow Warren Buffet’s recommendation and invest most of it in a well-diversified portfolio of low-cost exchange-traded funds (ETFs). Before you start investing, determine your risk tolerance, investment goals and time horizon, factors which help you decide which asset classes to invest in. If you’re in your 30s, have moderately high risk appetite, and want to invest for your retirement, you could allocate a greater percentage of your portfolio to higher-risk assets such as stocks, and a smaller percentage to bonds.
Unsure how to construct a portfolio that best suits your financial goals? Take Syfe’s Risk Assessment tool to view your ideal asset allocation. Syfe helps you invest in a globally diversified, low-cost portfolio of ETFs while keeping fees as low as 0.4% per annum. High fees erode your returns, so the best way to make your hard-earned money go further is by choosing low-cost investments.
Invest in yourself
Spend a portion of your bonus on your greatest investment – you. Take advantage of SkillsFuture credits / subsidies to deepen your area of expertise or learn new skills. Invest in a quality suit or dress that is appropriate for your work environment, and makes you feel confident when you put it on.
Think ahead to 2020
Use a part of your bonus to get a headstart on saving for your expected expenses in 2020. Be it a family vacation or minor renovations for your home, start saving for it now so you’ll be on track for these goals.
Give yourself a pat on the back
While we recommend saving and investing most of your bonus, it doesn’t mean you shouldn’t spend a little on yourself. Go for a relaxing massage or enjoy a staycation over the weekend – you deserve it after working hard the whole year.
While your bonus can feel like a windfall, don’t treat it like one. Instead, save and invest that amount wisely. You can start by finding out which portfolio is right for you.
Invest now and you’ll reap the financial rewards of this decision years later when you’re enjoying your retirement by a seaside villa in Italy.