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Smart Ways To Spend Your Bonus - A Good Article for You.  

Saturday, 5 January 2008

Smart ways to spend your bonus

With bonus money in hand, many will naturally think of splurging. But before they actually do this, perhaps they need to reconsider a few things.
PICTURE this: you’re expecting your annual bonus next month, and it’s worth three months’ salary! You’ve been waiting for this moment; you’ve worked hard all year and the star performance you have shown at work is now paying off.
What better way to reward yourself than to just spend all that extra cash!
Whoa! Don’t give in to this temptation. Take a step back and reconsider.
Is this bonus really different from your regular income that you can just treat it as unexpected, disposable money?
There is an old saying that goes like this: “Money suddenly gained often drains away, while money earned gradually stays with you.”
So, before you spend your hardearned bonus, here are a few things to consider.

1. Revisit your financial goals
If your bonus is so huge it dwarfs your regular salary, it could be irresistible to change everything around you. But before you zip around in a new Proton Persona, think again. The impulse to change the quality of your lifestyle is a short-term frivolity.
It is best to look at the overall picture. What are your financial goals? Consider your immediate needs and the future. Perhaps your immediate need is to clear debts that have been weighing you down, or settle some overdue home repairs, and then invest the rest.

2. Prioritise your debts
An average person would certainly have debts – hence, addressing this is your top priority!
i) It is advisable to clear your tax on your gross bonus (if this hasn’t been deducted at source); you don’t want to end up with the tax amount as a future debt!
ii) Then you need to prioritise the debt with the highest interest rates. One obvious example would be your credit card — that 18% per annum interest does not simply translate to 1.5% per month. There is a cumulative effect on overdue balances that is always carried forward, and you could lose hundreds on revolving high credit card balances. Next, pay off any other costly personal loans.
iii) You could also reduce your mortgage. You shouldn’t underestimate the benefits of overpaying your mortgage. For example, if you pay RM5,000 off on a 20-year RM100,000 mortgage in the fourth year, you will save RM10,700 on the total owed, reducing almost two years off the repayment period.

3. Park an emergency fund
Once your debts are cleared, it is recommended to set up an emergency fund equivalent to three to six months of your current income for emergencies.

4. Treat yourself and your family
At this point, it wouldn’t hurt to take a reasonable sum to be a little bit frivolous, perhaps to take your family on that long overdue holiday. After all, you did work hard for this reward… but only after taking care of your important matters above.

5. Invest the rest
Now that debts are out of the way, please don’t think you’re on the road to financial freedom! All you have done so far is the responsible thing – addressing your priorities. Consider how much of the bonus is still available. If you have a comfortable lump sum, this is a good time to get your bearings before spending it all.
While you’re considering (this may take a few months), it might be worth parking the money where capital is preserved while earning steady income. For instance, you could earn 3% to 4% per annum on money market funds, where your money can remain fairly liquid while “working” for you.

Below are some investing options for you to consider.
a) Protect your life and your family:
Use life insurance to protect the financial well being of your family, if something should happen to you. There is a personal tax relief of RM3,000 for insurance premiums for education or medical benefits, and a RM6,000 relief for life insurance premiums to be taken advantage of. You should also compare its long-term investment potential with other investment opportunities.
b) Kick-start your savings or begin a good investing habit:
Whether you want to retire early, save for your children’s education or put aside some funds to perform the haj, this is the time to pump up your savings or investment funds. There are many investment tools to park where your funds can just grow and work for you e.g. unit trust funds or ASN, bank assurance or savings products, or real estate.
You could jump-start an investment portfolio (seek professional advice if this is unfamiliar territory) and then continue with regular savings from then on. Dollar cost averaging, where you invest monthly at a constant rate, is always advantageous over the long-term as you will balance out the ups and downs in the market.
c) Invest a lump sum:
There is no dispute that real estate is where real investment is, as vouched by Donald Trump and Robert Kiyosaki. If you're happy to put aside the cash out of reach for, say, five years, assuming you already have a healthy cash reserve, you might want to consider investing in property.
Alternatively, you can invest in equities or a well-managed portfolio of diversified stocks with the help of a professional investment adviser. Consider this, investing RM5,000 today at age 40 will give you RM20,300 in 20 years' time, assuming a 7% per annum growth rate.
At the end of the day, do consider your options carefully. Whether the difference your bonus brings is life-enhancing or not depends on your circumstances, the size of your bonus and how you react to the sudden influx of money. A rich man is one with knowledge, happiness and health.

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