From clearing debt to pre-paying bills and investing for the future, here are the eight best things you should do with your year-end bonus (if you’re lucky to get one!).
The shock of the COVID-19 epidemic has highlighted the importance of prudent financial decisions. If you’re one of the lucky few to still be receiving a year-end bonus come December, you’re likely to adopt a much more cautious attitude than before.
Even after a year of global lockdowns and mass testings, the pandemic is far from beaten. You may be wondering, in such uncertain times, how you should best handle your incoming bonus. Prioritising more urgent financial needs, here are our eight best recommendations on what to do with your year-end bonus (you can thank us later).
- Clear any lingering debt
- Start or replenish your emergency fund
- Buy appropriate insurance
- Pre-pay your bills
- Stock up on essentials
- Top-up your CPF SA, MA or SRS
- Make a partial capital repayment for your HDB mortgage
- Make an investment
#1: Clear any lingering debt
If you have any high-interest unsecured debt (common, from credit cards), you should plan to use your bonus to clear your debts.
Wiping off debt from your balance sheet is important in times of uncertainty. If you should lose your income and can no longer afford to pay your debt, you will be forced to rack up expensive interest-charges that can snowball out of control.
Paying the minimum on overdue credit cards will only stop your debt from growing — any progress towards paying down the principal will be scant, at best. As you can imagine, getting caught in a situation like this is akin to trying to dig yourself out of a bottomless pit.
The only way to avoid this nightmare is to keep your debt under control. If you’ve racked up some unwanted debt on your credit cards because of the pandemic (you might have lost your job or had to invest in new work-from-home equipment), be sure to pay them down with your year-end bonus.
#2: Start or replenish your emergency fund
If you are debt-free (well done!), the next most important thing to do with your year-end bonus is to replenish your emergency fund or use it to start one.
There’s a good chance you might have dipped into your emergency fund for urgent purchases such as laptop upgrades or to create a proper home office space (never underestimate the importance of a proper chair and work desk for staying pain-free). If so, you should replenish your emergency fund with your bonus to maintain financial readiness.
If you don’t have a fund, there’s no better time to start one. Begin with your bonus (however large or small), then grow it in the coming months to eventually cover six months of expenses.
#3: Buy appropriate insurance
COVID-19 not only poses serious health risks, it can also cripple entire sectors and threaten livelihoods. Hence, it is important to ensure the right insurance protection for you and your loved ones.
This means including cover for immediate COVID-19 health risks (such as treatment and hospitalisation costs) as well as long-term commitments such as family income benefits and premium waiver riders for mortgages and life plans. Use your bonus to refresh an existing portfolio, or add on new plans to make sure your family is adequately insured.
#4: Pre-pay your bills
Consider using your bonus to make advance payment for the bills you’ll be receiving for the next 12 months. Pre-paying your regular bills is helpful because of three main reasons:
- You have one less bill to worry about each month
- Reduces the likelihood of incurring late charges for missed payments
- Can increase your monthly cashflow
Also, knowing that the household bills have been paid up for the year can give you more confidence in navigating career or salary changes in the coming year. The best bills to pre-pay are for services that have locked you in for a contract period. You can go ahead and pre-pay those because you know you’re on the hook for the entire duration and you won’t be making a change anytime soon.
#5 Stock up on essentials
A variation on the point above, but in physical terms, which may prove to be a more appealing money management method for some. If you or your family have must-buy groceries, toiletries or household products, consider using your bonus to stock up during year-end sales.
Besides money saved from bulk buys, you may also reduce the number of supermarket trips needed (at least in the initial few months), while having more cash in your household budget. Just be sure to ration your groceries, so you don’t inadvertently increase your consumption and watch out for spoilage caused by poor storage conditions.
#6 Top-up your CPF (Special Account, Retirement Account, Medisave Account or Supplementary Retirement Scheme)
Using your-end bonus to top-up your CPF not only strengthens your financial future, it also provides tax relief which could lower the amount of taxes you have to pay for the year.
There are three CPF voluntary top-up schemes that you can use to gain tax relief, namely, Special Account (SA) top-up, Retirement Account (RA) top-up (for loved ones). Medisave Account (MA) top-up, and Supplementary Retirement Scheme (SRS) top-up. See below for a summary.
|Name of scheme||Maximum potential tax relief (yearly)||Notes|
|CPF SA top-up (own account)||S$7,000||Capped at prevailing Full Retirement Sum|
|CPF SA/RA top-up (parents or grandparents x1)||S$7,000||Capped at prevailing Full Retirement Sum|
|CPF MA top-up||Lowest of:
– Voluntary cash contribution directed specifically to Medisave Account
– Annual CPF contribution cap for the year, less Mandatory Contribution (MC)
– Prevailing Basic Healthcare Sum(BHS), less the balance in Medisave Account before the voluntary cash contribution.
|Depends on your Medisave Account balance|
|CPF SRS top-up||S$15,300 (Singaporean)
|Subject to total Personal Income Tax Relief cap of S$80,000|
#7: Make a partial capital repayment for your HDB mortgage
If one of your long-term financial concerns is your HDB mortgage, you should consider using your bonus to make a partial capital repayment.
Doing so will reduce your mortgage amount (which also means less interest paid), and gives you the choice to choose one of two scenarios:
- A reduction in the tenure of your mortgage (but monthly repayment amount remains the same), or
- A reduction in the monthly payment amount (but the tenure of your mortgage remains the same)
Do bear in mind that a minimum of S$5,000 (with increments of S$1,000 each) is required to make each partial capital repayment.
#8: Make an investment
Having more money is always better than having less, and the best way to make more money is by using your money. In other words, investing your bonus is among the best things you can do with it. There are plenty of options for you to invest your bonus, with pros and cons to each. For a short-term investment, try fixed deposits, or short-term insurance plans that provide guaranteed returns upon maturity.
The amount you can make depends on the return rate, for example:
|Investment amount||Investment period||Return rate||Investment amount after 3 years||Gains|
|Manulife Goal 7||S$10,000||3 years||1.39% per annum||S$10,442.82||S$442.82|
Or, you could try investing in the market with the help of robo-advisers like StashAway and the like. With features like transparent fee structures and flexibility to withdraw your money at any time, robo-advisers are a good way to invest your bonus and grow it towards your future financial needs.
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By Alevin Chan
An ex-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 optimise happiness and enjoyment in his life.