Are you fortunate enough to receive an end-of-year bonus? Many of us have already spent our bonuses before the money has even been deposited. At the end of a financially-trying year, it can be tempting to take this extra money and spend like there’s no end. This is never a good idea. The value you will get from your bonus will be much greater if you plan wisely.

Draw up a bonus budget which outlines how much bonus money you will allocate to debt, savings and spending. Yes, you may spend some of your bonus but not all of it. First consider your debt and savings goals.

Don’t forget debt
Set aside a generous portion of your bonus to reduce short-term debt, such as credit cards, personal loans, or retail accounts. The interest rates on these debts are usually the highest, so reducing this debt is a priority. If your short-term debt is really high, consider using your entire bonus to reduce it or pay it off. It’s a tough choice, but you will save thousands by avoiding high interest payments. Plus, you will shed the emotional burden that carrying high debt brings.

Unlock the power of compound interest
Take some of your hard-earned bonus and put it into savings or investments, where it will work even harder for you, thanks to compound interest.
Compound interest is when the interest you earn on an amount of money earns interest itself. This means a small amount of money can grow into a much, much larger amount over time.

Think about retirement
Even if it’s far in the future, the power of compound interest on the portion of your bonus that you allocate to retirement savings means this small amount will grow into a far, far bigger amount when you really need it at retirement. Plus, you can deduct your contributions to retirement savings, with the maximum deduction in a tax year now at 27.5% of your taxable income or remuneration. This means that saving more for retirement helps to reduce your tax burden.

Create an emergency fund
We don’t know what lies ahead in 2018. Maybe your car suddenly needs urgent repairs? What if you lose your job? Emergency savings will help you avoid having to survive on high-interest debt if you suddenly need money in an emergency.

Invest in your child’s future
Another smart thing to do is to start investing in your child’s future. A good tertiary education is expensive. Think about using part of your bonus to start a savings plan for your child’s education.

Reward yourself
Once you have seriously considered all these important points, don’t forget to reward yourself. You should feel appreciated for your hard work. Set aside a small portion of the bonus as a personal reward. If this involves spending, spend wisely. Don’t be taken in by festive season hype and buy things you don’t really need or of inferior quality just because of sales hype.

Remember, before your bonus hits your bank account, draw up your smart bonus budget and stay on the road to financial wellness.

Article by momentum. 

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