This is the time for you to spend on that trip that you’ve been thinking about, that new iPhone you've been eyeing for months. For sure, you should treat yourself after working so hard, but it's also important to think about how you can derive get value from your bonuses in the long run.
1. Start clearing your loans
A substantial portion of your bonus should be paying off any short-term debt such as credit card dues and personal loans. Short-term debts carry the highest interest rates, so paying them immediately keeps you away from paying more interests in the long-term.
If you don't have any short-term debt, consider allocating money into your mortgage loan (if you have one). A decrease in your mortgage loan’s outstanding balance will reduce the interest charged. Let's take a look at the example below:
| Purchase price | RM300,000 |
|---|---|
| Total loan | RM270,000 |
| Tenure | 30 years |
| Interest rate | 5% per annum |
| Monthly instalment | RM1,449.42 |
| Total payment | RM521,790.62 |
| Total interest | RM251,790.62 |
To reduce the interest charged, you can make repayment of more than RM1,449.42 by using your bonus. The extra payments will reduce the principal outstanding loan amount and directly save on charged interest. This called the reducing method balance. You can check out how it works here.
2. Emergency funds
This type of savings can't be accurately measured (based on each individual's need) nor be calculated in terms of currencies (e.g. ringgits or dollars) but rather, months of living expenses that the funds are able to cover. As such, it is advisable that the most basic emergency fund should contain four to six months of your salary for unexpected circumstances.
It can be utilised for matters such as a sudden loss of a job or ill health. Invest in high liquidity and safe instruments like the Amanah Saham Bumiputra or fixed bank deposits to ensure you are cash-ready when faced with any financial crisis. Hence, if you are still building your funds, a credit card can be an alternative if used correctly.
3. Insurance coverage
Proper insurance coverage and policies are needed if you don’t already have one. If you are just starting out with your career and depending solely on the employer’s group insurance, you can use the bonus to purchase medical insurance. As a married individual with a family, ensure that you have sufficient life and health insurance cover on your loved ones too.
4. Investments (Short-term)
If you are placing some of your bonus into a savings account, you are in fact getting poorer by the day because the inflation rate is much greater than what the bank is compensating you in interest. What to invest in then? If you’re new to investing, it is better to begin by building a portfolio. Be mindful of the fact that the stock market is volatile and selections of stocks are aplenty so it might end up hurting you, therefore proper research is needed. Consequently, investing in a unit trust is a safe investing alternative.
5. Retirement fund (Long-term)
EPF has revised the Basic Savings to RM240,000 effective 1 January 2019 for its Members Investment Scheme. This means that you would need to put away more money for your retirement to look after your future. So why not invest in products with potential returns like shares, unit trusts, private retirement schemes (PRS), investment-linked insurance, annuities, real property and bonds.
For instance, if you RM50,000 in a mutual fund today with 8% growth annually over 20 years, you'll get RM230,000 at the end, which almost hit the minimum savings recommended by EPF.
6. Invest in yourself
Use your year-end bonus to purchase books, take some classes, further your education, and enrich your skill sets. It makes yourself more marketable to your employers, which eventually boosts your career. Thus, having newly acquired knowledge or skills would lead to an individual being able to start a business, which can help increase future wealth.
7. Have a bit of fun
It's pointless if your hard-earned money goes into repayments and the like without spending some of it to enjoy yourself, right? The important thing is to set limits. You could have a fun local trip with your loved ones or travel to a foreign country to broaden your horizons.
So which one should I focus on?
Well, it depends on what you want to prioritise first or you can start all. For example, if your bonus is RM10,000, you can separate your money as below:
| Allocation | Percentage | Amount (RM) | Description |
|---|---|---|---|
| Debt | 35% | 3,500 | Long- or short-term |
| Savings/Investments | 15% | 1,500 | Emergency funds |
| 10% | 1,000 | Short-term | |
| 15% | 1,500 | Retirement | |
| Insurance | 10% | 1,000 | Either health or life |
| Fun | 15% | 1,500 | Entertainment/Holidays |
| Total | 100% | 10,000 |
Note: this is just a rough guideline.
Remember, the choice is yours. It is up to you on how you would like to spend your bonus. You could actually be achieving financial freedom much earlier than your friends if you plan ahead for it!
