Here's how you can use your year-end bonus to meet long-term goals while treating yourself for working so hard.
We know, we know. You’ve worked hard for your money, and now you want to treat yourself. We wholeheartedly agree, but we'd be remiss in our duty if we didn’t urge you to include your year-end bonus into your overall budget.
Failing to plan what to do with your bonus makes you fall prey to mental accounting, a cognitive bias that makes your brain go fuzzy around unexpected money. Before you know it, you’ll have spent a month’s salary (or more) on unwise purchases that get in the way of your goals.
Strike a Balance Between Short-term and Long-term Goals
You don’t have to take an all or nothing approach. Instead, try dividing your bonus to cover all bases - i.e., make progress on your financial obligations, build up long-term savings, and also meet short-term or immediate needs.
Try a 50:30:20 ratio, where you put 50% of your bonus into debt repayment, 30% into savings (such as your emergency fund, or your SRS account) and 20% to spend any way you like.
If you don’t have any debt (good job, keep it up!) then feel free to focus on savings/retirement planning, and rewarding yourself. A good guide for this would be to put 60% into savings and 40% for fun.
Besides having fun, here are the 5 best ways to spend your year-end bonus:
1. Pay Off Your Credit Card Debts
We’ve said it before and we’ll say it again: the first thing you need to tackle is your high-interest debts. For most Singaporeans, the Number 1 source for this is credit card balances.
As recently as June 2015, unsecured debt among Singaporeans (a class of debt that includes credit cards and loans) continued to rise. This means that more people are owing more money.
You know that credit card interest rates are high; they can reach 28% or more, depending on how you use the credit assigned to you. But what does that mean in practical terms?
It means this: according to the Rule of 72, the amount of money you owe today will double in just over 2.5 years.
Trust us, you never want to get into a situation where you have to do deep and complicated calculations just to know if you can afford an extra piece of tofu for dinner tonight. So if you have outstanding credit card debt, pay it down with your bonus.
If your credit card debt is 12 times your monthly salary or more, use a debt consolidation plan to pay it down.
2. Start or Top-up Your Emergency Fund
Assuming you have little to no bad debts, the next highest-priority item on your list should be to start or top-up your emergency fund.
Individual needs may vary, but a good rule is to set aside 6 months of your monthly expenditure. That may seem like a lot, but if your annual bonus is around 2 months, you’ll be able to accumulate this in as little as 3 years.
Also, you’ll want this money to be easily accessible, so make sure you keep your emergency fund liquid (i.e., in cash form, or easily cashed out with negligible penalties or fees).
As with any large goal, tackle your 6-month emergency fund target by breaking it down into smaller, achievable steps. Even then, the most important thing is to start your emergency fund as soon as you can. During an unforeseen event, S$1,000 is much more useful than S$0.
3. Book Your Child’s PSLE Preparatory Courses
If your child is due to take their PSLE in the coming year, then you’ll want to reserve your bonus to pay for their preparatory camps or supplementary courses.
We’re not trying to scare you into giving up your children up for adoption, but PSLE preparation courses can cost anywhere from S$500 to S$1,500... per subject.
Multiply that by 4 (for each of the compulsory subjects that will be examined) and you’ll understand why parents get so anxious about their children’s scores. Hint: giving up the annual family holiday may have had something to do with it.
Depending on your child’s aptitude, you may only need to send her for one or two courses. But with everyone and (literally) their grandmothers sending your child’s classmates for supplementary lessons every chance they get, how comfortable are you leaving your children out?
Luckily, there are some ways you can reduce your expenses on supplementary classes. Booking the workshops early is a good practice, as you can eliminate the chance of exceeding your budget should you miss the intake of your intended learning centre.
4. Pay Your Insurance Premiums (and Other Bills) in Advance
If you have ongoing insurance plans, paying your premiums for the coming year will save you money.
Most insurers give you a slight discount if you pay your premiums on a yearly basis, versus say quarterly or monthly. This translates into savings over the long run that can quickly add up, depending on the type of plan and the age of the insured. In the case of an Investment-Linked Plan, the discounts are used to buy more units.
Another advantage of pre-paying your premiums is that you can avoid forced termination of your plan. If you are unable to pay your premiums and your plan is terminated early, you’ll often lose a large part of the premiums you have paid up.
You can apply the same practice to your regular bills as well. Pre-pay by estimating your monthly expenditure for each service or utility, then multiply by 12.
This will save you from late or re-connection fees, and also takes the pressure off you should you find yourself staring down unemployment. (Or if you simply want to go on a hiatus.)
5. Start a Supplementary Retirement Scheme Account
It is never too early to start your retirement planning - just ask the 6 in 10 Singaporeans that start saving only at age 45, only to realise they don’t have adequate funds.
If you don’t know where to start, consider putting your bonus into a Supplementary Retirement Scheme (SRS) account for 3 financial advantages.
Firstly, your SRS contributions count towards your tax deductibles, so you instantly save money, especially if you’re in a high tax bracket.
Next, you can use your SRS monies for investment, giving you a chance to beat the inflation rate and reap higher returns.
Lastly, at age 62 (the earliest draw-down age allowed) only 50% of your SRS monies will be taxed. You can also spread out your SRS withdrawal period over 10 years, which means you could well pay S$0* tax on your entire SRS amount.
(*Quick explainer: Assume you have S$400,000 in your SRS at age 62, and you draw down S$40,000 per year for the next 10 years. You’ll be taxed on S$20,000 (50% of S$40,000). However, the tax rate is 0% for the first S$20,000, which means you won’t have to pay any taxes at all.)
One caveat though: the SRS contribution rate is capped at a yearly limit of S$15,300 for Singaporeans and PRs, and S$35,700 for foreigners, so you can give up your fantasy of squirrelling your entire wealth away from the taxman.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimize happiness and enjoyment in his life.