For a majority of employees, especially those employed as civil servants, there is a bonus paid out at the end of the year. This is considered a “13th month pay” in some countries because you’re basically paid an extra month’s salary. Depending on your pay grade, the amount given is usually at least your basic salary. Usually I tend to hear about people simply blowing their bonuses on big purchases like electronics or a lavish holiday! “What else can I do?” you might ask. Well, you can use your bonus to supplement your financial wellbeing!
Do you use your bonus like the majority?
As I said above, a lot of people use their bonus as a means to enjoy more. This can be shopping sprees for electronics, going out for fancy dinners or taking a vacation. While you’re allowed to use your bonus as you please, instant gratification never lasts long. Soon, you may be looking for the next purchase to get that feel-good sensation!
What if I told you that you could do much more to make yourself more comfortable in the future? And this is simply by not splurging your bonus! However, for this to work, you need to have the discipline and control over your money. And it’s pretty easy to get into! You need to put yourself in the frame of mind that has set an invisible limit on spending. I found it’s much easier when I can visualise this limit by using an app to keep track of spending.
Also bear in mind that dumping your whole bonus into these strategies isn’t enough. You’ll need to have a plan to continue every month using a portion of your pay to build up. This is the discipline and consistency needed. Imagine something like a self-imposed TAP contribution.
1. Budget your bonus to spend for fun
If you already follow a budget, congrats! This means that your bonus is literally free money because you can already survive on your monthly income.
Still want to spend the bonus because you deserve it? Sure! Why not? If you still want some gratification to enjoy your bonus, go for it. There is no hard and fast rule to managing personal finance and you have to take your priorities and attitude into consideration. Budgeting to use your bonus is a good way to limit spending too; take the amount you want (e.g. 35% of the bonus) and put the rest away!
The idea of keeping yourself afloat financially is simply budgeting. There’s no secret sauce whatsoever; all we need to do is manage our spending so that it doesn’t burn a hole in our wallets. Not using all of your bonus also means that you’re in the right position to make your money work for you! But first you have to consider some other options to utilise your extra cash.
2. Create an emergency fund
An emergency fund is a lump sum amount of money you keep aside for a rainy day. And by rainy days I mean things like:
- unexpected medical treatments,
- car parts replacement,
- maintenance and repairing house and household items,
- retrenchment from companies scaling down.
Anything unforeseeable that can offset your monthly budgeted spending even moderately can justify dipping into these funds. Buying “wants” such as a new karaoke set does not justify using the emergency fund! Remember, only needs!
I personally practice this and got my wife to do it last year. When some of her car’s parts required replacing, she was glad to have that safety net and not needing to dip into her normal spending money.
Many people seem to advocate between 3 to 12 months worth of salary as a good emergency fund. If you use your bonus to build your emergency fund, you would have easily saved up 1 month’s worth already! Just remember that you absolutely cannot and should not touch this fund for normal shopping needs.
3. Saving up for goals
So you already have an emergency fund? That’s awesome! Now that you have some sort of safety net, you might have some big purchases in mind. This can be things that are as simple as buying a car or downpayment for a house. It might even be a huge Lego set you’ve been wanting to get!
Can’t you just pay with your bonus immediately? Well, you could. But remember that the lower the downpayment or deposit you inject in the beginning, the more expensive the purchase becomes over time because of interest! This places a heavier burden on you because you have less room to manoeuvre financially and become more dependent on your job and salary.
4. Paying down debt
One way to use your bonus is to use it to offset any loans you currently hold. This results in less monthly payments and therefore you save up on interest over time! Nothing much can be said about this usage because it’s simple as that.
But do ask your banker to calculate if it’s worth it to pay down your debt first. Sometimes banks impose fees to pay down loans which works out to be the same or even more expensive than paying monthly! Regardless, it’s a good avenue to check out if you have debt and have extra cash in hand.
One debt that is always worth paying off early is credit card debt. Credit cards have high interest rates that, if left unpaid, will lose you significant amounts of money! Therefore it may even be wiser to focus on paying high interest debt first when considering where to park your bonus.
I left investing the last because of a simple fact: You should not invest money you can’t afford to lose. This means that the money that you need is not in danger of being lost to the market if things don’t go as expected. This is a significant advantage over people who gamble their savings and livelihoods on investments and hoping to get rich from it.
There are many investment vehicles available that you can look into:
- Exchange-Traded Funds (ETFs)
- Real estate
- Mutual Funds
As always, doing your research first before jumping in will save you some sleepless nights resulting from a bad choice when investing. Also, some investments such as real estate require higher starting capital so bear in mind you might still need to save up before going for it.
I began reading and learning about stocks and real estate long before I had any cash to put into anything. Knowledge takes time and so does saving up. But once I got over the hurdle of having a good emergency fund, I could then direct funds into investments. So I really recommend learning as soon as possible; there are also ways to buy smaller lots for certain investments like stocks, bonds and cryptocurrency.
All the suggestions I wrote above requires 1 thing: discipline. The first step is always to start. Then it becomes habit and finally a discipline which “just happens naturally”. Also, it’s possible to do all the above in one go! How much of your bonus you choose to allocate to each is up to you. Only you know what priorities you’d want to spend on in life.
Heck, you could even allocate a fraction of it for something fun right now. What’s important is you have control over money and not the other way around.
Happy New Year and cheers to a wealthier 2018 everyone!
Yay! Bonus is out! …. Aaaaaand it’s gone.
– A typical Bruneian, maybe