It's time to put your bonus to good use
By Lorna Tan
If you don’t have time to read through the whole article, you can check out our short version below
- Put your annual bonus to good use to achieve a sustainable financial future.
- It is recommended to set aside emergency cash to cover at least 3 to 6 months of your monthly expenses, and more if you have dependants.
- Invest your positive cash flows to make your money work harder.
The first quarter of the year is usually the time of the year when you look forward to the most - when you receive your well-deserved annual bonus. Surely this is the chance to spend it on that trip (once borders are opened for mass travel) in your wishlist, or the new watch that you have been eyeing.
With the adverse impact of the Covid-19 pandemic on corporates paying bonuses in 2021, it is likely that a smaller number of employees will have good bonuses, compared to previous years. Still it is worth your while, if you belong to the category that received bonuses, to put them to good use to achieve a sustainable financial future.
Let us take a closer look at 7 ways you can put your bonus to good use.
1. A buffer for rainy days
Bonuses are like mini windfalls, not guaranteed and likely to depend on both the performance of the individual and the company. As such, it is prudent to save some as a buffer for the rainy day.
It is recommended to set aside emergency cash to cover at least 3 to 6 months of your monthly expenses, and more if you have dependants. Doing so will enable you to tide over tough times and counter financial difficulties resulting from potential job retrenchments and wage cuts. It will also avoid the need to liquidate investments, just to raise cash, at an unfavourable time and price.
If you have not parked the required amount of emergency savings yet, start by setting a goal and saving towards it with your annual bonus.
2. Pare down debts with high interest fees
While most Singaporeans have some form of debt, the unsecured loans (e.g. outstanding credit card balances) are the ones you should try to clear first, due to the risk of incurring additional fees because of the high interest rates. It is prudent to set aside a portion of your bonus to do this, if there are such outstanding payments to be made.
Do note that a credit card debt of $2,000 might take you almost 30 years to pay off entirely if you are merely repaying the monthly minimum payment, assuming an interest rate of 18% per annum.
By using your year-end bonus to settle such debts, you can save on interest payments in the long run. These savings can be translated into additional cash for you to save and invest to boost your financial strength.
3. Make your money work harder
If you have set aside enough emergency cash and insurance cover, invest your positive cash flows to make your money work harder.
So consider allocating a portion of your bonus (we recommend you apply this rule to your monthly salary too) into regular investment plans. This will help you enjoy a lower investment cost over time and help you ride out the market volatility. It will also place you in an advantageous position to receive a bigger windfall or bonus in the later stages of your life when your investments bear much fruit.
If you are a newbie, start with baby steps while you empower yourself with knowledge on investing to increase your understanding and confidence. You can consider signing up for a Regular Savings Plan like the DBS Invest-Saver, which allows you to invest a fixed amount into investments that include exchange-traded funds and unit trusts.
Another way is to consider DBS digiPortfolio – a low-cost robo-advisory platform – that offers access to managed portfolios of securities. The asset allocation will depend on your risk profile so that you can still sleep peacefully at night while investing.
Alternatively if you prefer to exercise more autonomy in your investments, you could invest in Equities. But do your due diligence first.
As a guideline, you can aim to have an Invested Assets to Net Worth ratio (Assets minus Liabilities) of at least 50%.
4. Plan for the long-term
While short-term needs are important, being mindful of building a nest egg for long-term financial objectives like financial freedom, is essential. Starting to save and invest early for, say retirement, can go a long way especially if have a long-time investing horizon to reap the benefits of compound interest. For instance, by simply saving $500 a month and growing your savings at 6% per year, you will be sitting on a significant sum of about $1 million in 40 years.
To help you, consider using digital tools like the financial and retirement advisory tool DBS NAV Planner that offers guidance on identifying and closing your money gaps as well as a simulation facility to project your income streams over the years.
5. Top-up your retirement savings
Consider optimising government schemes like the Central Provident Fund (CPF) and the Supplementary Retirement Scheme (SRS) to grow your retirement pot.
CPF accounts offer attractive interest rates of up to 6% a year. Doing so early will allow the compounding to work in your favour. Cash top-ups under the CPF Retirement Sum Topping-Up Scheme to certain recipients will result in potential tax savings too, subject to conditions. And the recipients will benefit from higher monthly payouts for life in their golden years.
Your CPF savings which yield at least 2.5% per year can be invested under the CPF Investment Scheme, if you would like your money to work harder for you.
In addition, contribute to the SRS to achieve some tax savings and invest your SRS savings to grow your retirement monies over time. With proper planning, it is possible not to pay tax on these SRS savings during your penalty-free withdrawal years.
6. Invest in yourself
Investing doesn’t have to be limited to the financial markets. You can also set aside a portion of your bonus to increase your income opportunities via upskilling of relevant skillsets ranging from digital to physical. The benefits of learning a new skill can far outweigh its short-term cost. So, consider putting your SkillsFuture credits to good use or reduce out-of-pocket course expenses by getting company funding.
Learning a new skill will increase your knowledge which will enhance your readiness to take on a larger portfolio or scope at work. This will give you both a renewed sense of motivation and support for promotion opportunities. Furthermore, your efficiency will likely be enhanced leading to improved work-life balance.
Having additional skills will also help you to re-invent yourself and be open to secondary jobs and/or side hustles.
7. Reward yourself
Your bonus is a reminder and validation of how hard you have worked throughout the year. To encourage yourself, you can use it treat yourself to something nice – be it a good meal, a short vacation with family and friends, or a gift for your loved ones (or yourself!). Take this opportunity to give yourself a pat on the back for a year of hard work as you get ready for another great year ahead.
However, avoid the temptation to splurge or go overboard. And do consider the other ways to utilise your bonus wisely as well.
Ready to start?
Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.
Alternatively, check out NAV Planner to analyse your real-time financial health. The best part is, it’s fuss-free – we automatically work out your money flows and provide money tips.
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.