How To Use Your Year-End Bonus Wisely

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If you are among the lucky ones who are receiving a year end bonus, congratulations! For example, civil servants around Malaysia are receiving one to two months bonus payouts, either in December or spread over several months into 2024.

Some private company employees are also receiving their annual bonuses depending on their companies financial results for the year. For example, Taiwanese shipping giant Evergreen Marine Corp awarded bonuses of between 10 to 52 months salary last year!

What happens next? Do visions of big screen TVs and vacations immediately come to your mind? Whenever a large sum of money falls into your lap, you need to have a plan for it, so you don’t wake up a month or two later and realise that it’s all gone.

Treat your bonus like any other pay cheque that you receive all year round, and not a jackpot because you got lucky. Here’s how:

1. Pay off any outstanding debt

This is the perfect opportunity to pay off credit card or any other loan debts, which may be costing you hundreds or thousands in interest payments every year.

Credit card debt has high interest rates, which means you should keep it low or zero if possible. So your first priority is to take that bonus and pay off or reduce such outstanding debt if you have it. If you don’t like to have loans like student or personal loans hanging over your head, it’s good to allocate what you have left to paying it down faster so you can focus on other financial goals.

Paying down debt can also boost your credit score, which can save you money on interest on other loans down the road.

2. Move it to emergency savings

We never know what can happen tomorrow. Car problems, medical emergencies, or even job loss can happen anytime, and even without warning. So, it will be wise to keep your bonus away in an emergency savings account. Build three to six months’ worth of living expenses in a separate account.

This can help you avoid landing yourself in high-interest debt or worse, raiding your retirement savings if you have unexpected bills or lose your job. Keep the money in a highly liquid (but not too easily accessible) account that can still earn you some returns.

3. Choose higher-yielding investments for longer-term goals

Remember, saving money will never get you rich. You need to make your money work harder than sitting in a low-interest fixed deposit, or worse, savings account.

Some of the recommended investment products that offer decent returns for your money are stocks, bonds or even real estate. Your bonus could easily help you kick start your investment portfolio. However, only invest in products that you understand, so you will be able to manage your risks.

4. Pay down your mortgage

A bonus come in handy in paying down your home loan. If you have flexi or semi-flexi home loan, the additional money you get from your annual bonus can be used to pay down the principal of your home loan. By doing so, you can save significantly on interest in the long run.

If you are struggling with your mortgage, you could do some research to see if refinancing your home could save you money in the long run. The bonus could cover the closing costs.

Depending on the size of the bonus, consider paying off your mortgage loan more quickly. A lump sum contribution could reduce how much interest you pay overtime and bring the mortgage down to a conforming loan, which would drastically lower your monthly payments.

A lump sum payment now with your bonus can mean less interest charged overall.

5. Set it aside for both expected/unexpected large expenses

Plan ahead and think about any large expenses coming in the next year. Is your refrigerator about to fall apart? Or your car needs an overhaul soon? Or perhaps you’ll need some dental work.

You can also contribute to a long-term savings goal, like buying a home, wedding expenses, or starting your own business. Or if you haven’t yet started saving for your child’s college education fund, this could be a great way to jumpstart it.

Otherwise, it’s time to invest the money for your chosen goals: your next home, a new car, your wedding, starting a business, or whatever other dreams you may have.

Set aside money for those large expenses so you don’t stress when they come by.

6. Beef up retirement funds

In this times and age, we cannot simply rely on our Employee’s Provident Fund (EPF) savings alone to ensure a comfortable retirement. To ensure we preserve our quality of life even in our golden years, we must be proactive in investing for our future.

For example, Malaysians can invest in the Private Retirement Scheme (PRS). All PRS providers in Malaysia are administered by the PPA (Private Pension Administrator Malaysia). Additionally, you can qualify for income tax reliefs for the money you invest in PRS.

The annual bonus can make up a sizable chunk of your retirement savings and by investing in the right investment, you can reap the rewards later. The earlier you start, the better as the power of compounding interest can definitely work in your favour.

7. Upskill yourself

The job market is undoubtedly more challenging and competitive than ever before. Add to that the rising cost of living and inflation eating into your monthly income. This means having less disposable income after you deduct your monthly expenses for housing, food, utilities and transportation.

To be able to stay on top of your game, you must constantly upgrade your hard and soft skills. With budget cuts in most companies and even the Government, it will be foolish to expect your employer to spend money on training you.

So, spend 10% to 15% of your bonus on a training programme, books, learning CDs and other such resources – and it may make a difference between promotion and unemployment.

But don’t forget to have fun

A bonus is a cause to celebrate, and the lucky recipient can certainly spend a small amount of that bonus or raise on a special meal or new outfit. However, the rest of the ‘windfall’ needs to go someplace that will benefit you long after.

You’ve been busting your butt all year, and this is your reward. So think about what will make you the happiest. Perhaps you could splurge on a massage, take a weekend away or have a nice dinner out. As long as your finances are zipped up, we say you can spend up to 20% of your overall bonus in pursuit of some relaxation time.

It’s always great to get a bonus. But it’s even better when you use the extra cash to make smart financial moves that can increase its value exponentially over time. So, make the most of this one all-too-rare opportunities to improve your financial situation without having to tighten your belt.