So you worked hard all year in your job and your manager is happy with your performance. Your reward at the end of the financial year as an employee, will be a monetary reward like a performance or year-end bonus. Congratulations! In the current economy, the extra dollars can be hard to come by and can go a long way – that is, if you use them wisely.
Here are 6 suggestions for getting the most out of your bonus.
Pay off debt
If you have a credit card debt or a personal loan that you are repaying every month, using your bonus to pay it off would be your best bet to getting yourself out of the red and into the black. Even if your bonus cannot fully pay off your debts, it reduces the principle amount of your debt and allows you to pay it off much earlier.
Build an emergency fund
Financial experts usually recommend setting aside 3 to 6 months worth of household expenses as an emergency fund. Personally, I maintain an emergency fund of up to 3 months worth of household expenses simply because of the employability of my job. That said, I’m still optimising my monthly expenses to reduce my spendings. If your current job has a low employability and you think you would need more than 3 months to find a new job, I suggest that you stick to the general rule of having 6 months worth of household expenses as an emergency fund. If you’re just starting to build your emergency fund, your bonus can play a substantial role in building the fund.
Maximise your tax contributions
In Singapore, your bonus becomes part of your taxable income. Therefore it’s worth doing some calculations to tally your taxable income for the year to see how much your bonus is going to cost you in taxes next year. For example, if your current taxable income is $80,000, a $5,000 bonus would cost you an additional $575 (11.5%) in taxes. While income tax rates in Singapore is relatively low compared to other developed countries, you will need to ask yourself if there’s a need to use your bonus to maximise your tax contributions to reduce next year’s income tax.
Invest in your retirement portfolio
If you don’t have any immediate need to spend your bonus, consider adding some money to your retirement to build up the nest. That gives your retirement nest some time to compound some returns before you retire. With a 4% annual return on your retirement investment portfolio, every dollar you add to your retirement nest today would double its value in 20 years.
Invest in yourself
Apart from investing in investment vehicles to grow your assets, is there any course or certification that you have been thinking about taking to better yourself? It could be a Master’s degree to progress to the next level of your career, or skill-based courses like cooking classes to improve your cooking skills so that you can prepare restaurant-quality dinners at home instead of dining in restaurants on weekends.
All work and no play makes Jack a dull boy. After working hard for a full year, think about rewarding yourself with some indulgence. While spending all your bonus money on indulgence may sound irresponsible, how does allocating 10-20% of your bonus money on a vacation sound to you? The allocated amount of money may not get you to the travel destination of your choice, but it could be a start to building your vacation saving goal.
How I’m allocating my bonus next month
With a bonus of $5,000 coming in next month for last year’s performance, I intend to allocate 90% of the money to my SRS contribution for 2015 to keep my taxable income low and 10% to my vacation saving goal. As an avid backpacker, $500 could probably cover my budget return flight within Asia and I’ll need to save a bit more for the trip itself.
How are you allocating your bonus money?
Many blogs and websites have wrote about their views about why you should not pay off your home mortgage early. They advocate that you should keep your low interest home mortgage for as long as possible while investing the rest of your money in investment instruments that offer a much higher potential return.
In this article, I would like to share a contrarian view of why it may be a better idea to pay off your home mortgage instead.
Avoid any risk of losing your home
The idea of a home mortgage relies on the fact that you have job security. Unless you have a cushy job in the public sector, there’s always a chance of losing your job when your firm goes through a rough patch in the economy.
If you lose your job and are unable to service your mortgage, the bank would not hesitate to foreclose your home.
The mortgage loan interest rate is real
You put your money into your investments with the mindset that the returns will be higher than the interest that you are incurring on your mortgage. But always remember that while your paper gains are not realised, the mortgage interest has already been realised and charged to your account.
Not everyone with a mortgage loan is a good investor
When many bloggers and professionals advocate that you should not pay off your mortgage early, they assume that you are a good investor with the capability to generate returns through investments. But the problem here is that not everyone with a mortgage loan is a good investor.
Can you confidently say that you are a good investor? Are you able to keep your cool and not sell all your shares when the market is down? Do you know when you should take profit when your investments are performing?
Being debt-free reduces your monthly expenses
If you are planning for an early retirement or a possible sabbatical, being debt-free will reduce your monthly expenses significantly. With a lower monthly expense needed for your retirement, it makes your retirement planning much easier to achieve.
Even if you are not planning to retire, having additional cash in your bank due to your debt-free status means that you can put more money into your investments and grow your portfolio.
Don’t mess with your CPF accounts for retirement
The Central Provident Fund (CPF) started as a comprehensive social security system that enables working Singaporeans to set aside funds for retirement. Subsequently, the system also started to address healthcare, home ownership, family protection and asset enhancement.
The problem with Singaporeans these days is that the modus operandi of purchasing a property in Singapore is to tap on almost all the money in their CPF Ordinary Account and subsequently service their mortgage with their monthly CPF contribution as well. This is the same for me as well.
With lesser money in their CPF account, it would be harder to make use of the power of compounding interest to build their retirement nest.
Would you prefer to service your mortgage as long as possible or would you rather pay it off as soon as possible? I’d love to hear your take on this. Please share your thoughts in the comments below.
The Monetary Authority of Singapore (MAS) has just released a press release with more details about the Singapore Savings Bonds (SSB) programme that I blogged about earlier.
Low barrier to invest and 6-month interest payout (Yay!)
The barrier to invest in SSB is a low sum of $500 which I would like to think that most middle-income Singaporeans should be able afford. This is half of what you would need to have in order to invest in a SGS bond or Treasury Bill. I also like that the payout of interest is set to every 6 months instead of once a year.
Ability to sell SSB and withdraw the money at any time without penalty (Yay!)
As an investor, the liquidity of bonds is always an issue because premature sale of bonds may result a loss in principal or interest. Giving bond-holders the flexibility of selling SSB without incurring any penalty is great because they can sell their SSB to capitalise on any investment opportunity that they come across.
Interest rate tied to Singapore Government Securities (SGS) rates (Meh!)
As SSB interest rates will be tied to SGS bond yields and increased over time, let’s look at how our SGS treasury bills and bonds are faring today (30 March 2015).
If you invest $1,000 in SSB today, you will receive 1% interest ($10) in a year. If you put the same amount of money in a fixed deposit, the highest interest rate in the market today is at 0.63% ($6.30) offered by RHB Singapore. Sounds like SSB is good right?
Let’s say you put in another $1,000 in the second year because you like what SSB is offering. The average interest rate you will receive for the $2,000 worth of bonds is now 1.16% ($23.20), an average of 1-year and 2-year bond yields. The highest 2-year fixed deposit interest rate available today is 1.13% ($22.60) offered by RHB Singapore. In both cases, SSB offers a slightly higher interest rate.
A fluctuating interest rate (Yay and Meh!)
If you look at the SGS website, you would see that bond yields fluctuate every day. As SSB interest rates are tied to SGS bond yields, you would expect them to fluctuate on a daily basis as well.
The fluctuation could go both ways for investors. Over the past week, we see 1-year SGS bond yields gradually inching up bit by bit to 1% as of 30th March. That is a good thing, but there are also cases where SGS bond yields decrease due to various factors. Fortunately SSB bond-holders will be able to sell at any point in time without incurring any penalty. That means if SGS bond yields are too low, one could always switch to fixed deposits or other forms of fixed income investments.
Will I invest in SSB if it was available today?
As of today, the interest rates offered by SSB is definitely better than the current fixed deposits offered in the market. However, I don’t have any fixed deposits under my name anyway. Instead, my money is all kept in my OCBC 360 account which generates 2.05% interest per year. That is definitely higher than what SSB is offering so I’m unlikely to make the switch.
I would adopt a wait-and-see approach and find out how the market reacts when SSB becomes a reality. Banks would definitely have to increase their fixed deposit interest rates to retain their customers. I’m also hearing rumours that the OCBC 360 account may have some adjustments made to their current interest rates so it may be a reason for me to switch to SSB too.
Here’s an infographic about the Singapore Savings Bond that was created by Business Time.