If you’re lucky enough to receive a bonus this year, you may feel the urge to spend it all at once – but this won’t improve your finances.
Two financial planners share their recommendations on how best to make your bonus work for you.
Tip: Use a budget calculator to better understand your financial position.
Who gets a bonus – and how should you use it?
An annual bonus is a perk given to reward employees for their performance and dedication. Unless otherwise stated in your contract of employment, it is given at a company’s discretion.
This windfall shouldn’t be seen as a licence to spend, however. Here’s how to make the extra cash a catalyst for financial success.
1. Write off high-interest debt
It’s worth using your bonus to chip away at high-interest credit-card or loan balances.
“Reducing your debt can save you a significant amount of money in the long run,” explains Fred Wagenvoorde, a financial planner at Fiscal Private Client Services. “You’ll not only save on interest payments but also improve your overall financial health, and free up cash for other expenses or savings goals.”
2. Set up or boost your emergency fund
An emergency fund serves as a safety net to cover the unexpected, such as car repairs, medical bills, or job loss. “It can save you from relying on costly credit cards, or dipping into investment savings, during difficult times,” says Wagenvoorde.
3. Pay into your home loan
It’s a good idea to reduce your outstanding home loan amount and the interest paid over the life of your loan, says Paul Menge, an actuarial specialist at Momentum’s Investo Product Solutions.
“Contact your lender and discuss making a lump-sum payment, provided there are no penalties or restrictions stipulated in the loan agreement,” he says. “This can lower your monthly repayment amount, freeing up extra cash.”
4. Invest in your future
If your financial situation is stable and you’re not facing immediate financial obligations, consider contributing to your retirement fund or tax-free savings account.
“Not only are you investing your bonus, you’re also investing in tax-efficient vehicles for retirement,” says Wagenvoorde. “This can significantly boost your retirement savings, and help you reach your long-term financial goals.”
Menge agrees. “If you already have an emergency fund, don’t just place the funds into a savings account, as you can achieve higher returns elsewhere, such as through a tax-free savings account.”
Another option is investing in an index fund, which aims to offer the same returns as certain share market subsets. “The cost of this investment is relatively low, but make sure you can handle the risk and stay invested,” notes Menge.
5. Treat yourself – within reason
Don’t deny yourself the joy of spending at least some of your bonus, since you’ve worked hard to earn it, says Wagenvoorde.
“Proper financial planning is all about balancing spending and saving, so allocate a portion of your bonus to treating yourself to something you’ve been looking forward to, such as a weekend getaway. Remember to stay within your means.”
Avoid these common mistakes
Menge cautions that by spending on your “wants”, rather than your needs, you may go into January in a weaker financial position.
Wagenvoorde warns further that blowing your funds on luxuries you couldn’t otherwise afford can lead to “lifestyle inflation”, which involves adjusting your spending as your funds increase. Taking out a loan against your bonus to fund non-essential expenses is particularly risky.
“This will only add to your debt burden and make it harder to reach your financial goals,” he warns.
Guard against making reckless or overly ambitious investment choices, or increasing your risk tolerance, advises Wagenvoorde.
“Invest in assets that align with your financial goals and risk profile,” he concludes.
Tip: Debt consolidation can restructure multiple debts into a single, affordable monthly payment.