It’s that time of year again, when year-end bonuses have been or are about to be announced. (If you get one)
And before it hits your account it is important to think about what you should do with it and how you can optimize it because after all it was hard earned so you want to get out of it. the best part.
I say part, because maybe you don’t intend to spend it all and maybe you aren’t going to save it all either, then you might be wondering if there is an amount optimal or% that you should split between the two?
And I think so.
I referred to a rule of thumb in an article I published a few weeks ago on the% you should save and / or spend when you get a raise. And those are great numbers that can also be applied to an annual bonus payout.
Let me remind you what they are.
Spend Twice Your Retirement Years
Record your age, as a% of the bonus
If your bonus was € 4000 and you were 32, then this rule of thumb would suggest that you spend 66% of your bonus i.e. 32-65 = 33 x 2 = 66.
Thus, you are free to spend € 2,640 of your bonus and save the balance.
When we look at the second rule of thumb, it suggests that same person saves 32% of their bonus and spends the rest, so the two rules of thumb are roughly the same.
Which amounts to spending two-thirds of the bonus and saving one-third.
Having said that, if you have high double-digit debt, or if you are saving for a deposit on a house or something, or if you have very little savings, then maybe these percentages need to be adjusted and skewed more. towards savings and / or debt repayment, and a much lower percentage allocated to spending.
Okay, let’s say you’re good with% and now you know how much you can spend, what are you going to do with the savings part? Where are you going to deposit this money, and I see four good areas:
Get rid of debt
Like I said before, but I’ll say it again, depending on your situation, paying off debt is something you may need to do. But if you feel aggrieved that you have to do so, it may help to know that paying down or reducing debt can also be a great investment, especially when the rates for money on deposit are so low and the inflation so high.
And yes, understand that this isn’t the most glamorous way to spend your bonus, but it can be one of your best financial decisions nonetheless. The less debt you have, the more your income can be freed up and allocated to other areas. And of course, you’ll pay less interest in the long run, but that’s almost a sum because it’s not something noticeable that you’ll see deposited into your account, whereas having more disposable income lasts. is.
Increase your retirement fund
You may not be contributing the maximum amount to your retirement fund as much as you can, and you may be able to supplement the amount by making lump sum payments to your pension through voluntary supplementary contributions (AVC).
If, for example, you are 31 years old, you can personally contribute 20% of your income up to an income ceiling of € 115,000.
So if you are currently contributing, say 8% of salary, you can make additional contributions of up to 12%.
If we look at the example I gave earlier where this person has € 1,360 to save, and if they pay that into their pension fund, after tax deduction, and suppose they pay tax at the marginal rate of 40%, it will only cost them € 816, and they will get a refund of € 544.
Which means that when they receive the tax break they can increase the amount they can spend of their bonus by an additional € 544. So on their bonus of € 4000, their spending can now reach € 3,184, but they did not sacrifice the amount they should have saved, that amount remains the same.
Thus, in addition to planning their future, adopting this strategy, they transform their bonus of € 4,000 into a bonus of € 4,544.
Investing for long-term growth
We know if you leave money on deposit it won’t pay off. In fact, its value will decrease if you factor in inflation.
If the € 1,360 that I spoke of were saved, next year after inflation sets in, will only be worth € 1,292.
Which is not a decisive factor but when you take into account the lost opportunity, not to invest in accounts that bring in for example 5%, the differential between the money on deposit and in a well-managed fund becomes quite wide.
And you might think that 5% is pretty high and where would you get that type of return. In fact, I’m lowering the return to 5%, we have accounts where our own clients have achieved + 42.4% returns in the last 12 months and earned + 21% per year for the last three years, so these accounts exist and there are many.
So the type of fund you invest in matters, it has to be in a good Exchange Traded Fund (ETF) or a managed fund, it just has to be. Or maybe you can use an online platform like Degiro or Revelot to buy crypto if you want to and see how it goes.
Whatever mechanism you choose, whether manual or not, you need to be proactive and do something. You don’t really have a choice if you want your savings to keep up with inflation, which is currently around 5%. This is the minimum return you need to get on your savings just to keep their value, not to mention their increase.
And you won’t get that if it’s on a checking or deposit account, that’s for sure.
Investment in oneself
It’s a bit of a cliché I know, but investing in yourself is something you should consider because your career is where most people get the vast majority of their income, which is why you never stop focusing on it.
Use part of your bonus to invest in continuing education, books, attending conferences, etc. makes good use of it and even a small change in the way you work and what you do can make a big difference. Adding value to an employer above what is expected and making yourself more valuable to them and more attractive to others, can increase the amount you earn, which can lead to hundreds of thousands of additional income earned on the employer. during your life.
That’s about it for me in 2021. It is a privilege to write for you every week and I hope you have found my articles during the year informative and above all useful. I can’t wait to pick up where I left off in January 2022.
I wish you all a safe Christmas and best wishes for the New Year.
Liam Croke is Managing Director of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie