Have a spending plan
First and foremost, create a spending plan for your bonus. It assists you with prioritizing your spending on things which benefits you and your family the most. After considering all your expenses, you can break down your bonus into a few categories with respective percentages.
Here are ways that would aid you to use your bonus wisely and it should be taken into account when you are constructing that spending plan.
1. 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. A decrease in your mortgage loan’s outstanding balance will reduce the interest charged. For example:
|Interest rate p.a||5% per annum|
In fact, around half of your loan repayment is to service the interest. To reduce the interest charged, you can make a repayment of more than RM1,449.42 by using your bonus. The extra payments will reduce the outstanding loan amount and directly save on charged interest.
If you are one of the PTPTN borrowers, by using your bonus, you can enjoy certain incentives. One is a 15% discount on the outstanding debt for full settlement and another is a 10% discount for payment of at least 50% of the outstanding debt made in a single payment. If your bonus is not sufficient to entitle you for either discount, your available EPF 2 funds can be your source too.
Bear in mind that some people tend to pay off their debts using their bonuses to access more credit in the year ahead. Obviously, they are not aware of the fact that there is no benefit from their bonuses in the long run, if they do so. Therefore, keep yourself away from having debts and allocate further funds towards savings when you decide to settle debts by using your bonuses.
2. Emergency funds
It is advisable to set aside funds of four to six months of your salary for any emergency purposes. It can be utilized to meet unexpected circumstances such as a sudden loss of job. 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 unwanted financial emergency. 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 a medical insurance. As a married individual with a family, ensure that you have sufficient life and health insurance cover on your loved ones.
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. Consequently, investing in unit trust is a safe investing alternative.
5. Retirement fund (Long-term)
EPF revised the basic savings from RM196,800 to RM228,000 effective Jan 1, 2017. This means that you would need to put away more money for your retirement to look after your future. The earlier you initiate a retirement plan, the larger the amount you can generate for your sunset years. Begin your plan by using your bonus right away.
The common investment products include shares, unit trusts, private retirement schemes (PRS), investment-linked insurance, annuities, real property and bonds. These are all different in terms of their potential returns, ease of converting into cash and safety of investment. For instance, when RM50,000 is put in a mutual fund today, growing 8% annually over 20 years. You get RM230,000 in the end, which satisfies 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 start up a business, which can help increase future wealth.
7. Have a bit of fun
It is 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 trip with your loved ones or travel to a foreign country to broaden your horizons.
We simplified everything into a table below for our readers' viewing pleasure:
|Debt||Long- or short-term||35%||3,500|
|Savings / investments||Emergency funds||15%||1,500|
|Fun||Entertainment / holiday spending||15%||1,600|
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 achieve financial freedom much earlier than your peers if you start to make a spending plan for your additional funds to aid you in making savvy investment decisions.