If you work for a company that gives you annual bonus, you'll probably always look forward to the additional year-end payments to your bank account. Perhaps you've been dreaming of how great it is to have a new 4K television in your living room. When actually to actually make use of annual bonus, you need some simple financial planning. If you are lucky enough to have a job that makes you eligible for a year-end bonus, here are seven things to do with it.
1. Don’t count your chickens before they hatch
Your annual bonus may seem like a sure thing because you get it every year, and you've made a plan for what to do with it based on the amount you expect to receive, but it's good not to spend it all before you belong to you. If, for some reason, you did not get your bonus that year, you will regret when you have to suddenly owe it to cover the needs you have already planned.
2. Factors of income tax
Do not forget the income tax that is your obligation. When you receive your bonus, the amount will be much smaller than your manager mentions due to income tax deductions. And, if your bonus is greater than your regular salary, it may be taxed higher. .
3. Formulate a financial plan and stick to it
Once you know exactly how much you receive, you can start to create a realistic plan to use your bonus money.
"Treating it as a windfall and blowing it on whatever you want is a mistake," said Mike Holman, author of the Toronto-based Smart Blog blog. "It’s an easy thing to do because it’s a separate, special pay cheque. It doesn’t sound like a lot of fun, but for a lot of people, taking just 10 to 20% for fun money and putting the rest toward something responsible is best."
Nancy Zimmerman, a money-based coach and Yellowknife-based blogger, agrees that people need to have a clear intention of how to spend a bonus. First and foremost, I want people to have financial goals for themselves,” says Zimmerman. “When the bonus comes, they can use it to give themselves a boost on their goals.”
Zimmerman said that's how he saved enough money for the down payment of a Vancouver condo a few years ago. If it were not for his obvious investment objectives at the condo, he was sure he would squander a lot of money.
4. Increase your retirement savings plan
Most people with retirement savings have plenty of room for additional contributions. So directing a few percent of your bonus to your retirement savings is a good decision, and will also result in higher tax returns the following season. Some workplaces organize bonuses so that if an employee contributes to his retirement savings, the income tax is reduced even the entire bonus can be invested. If your company offers this option, it is the right choice to use it..
5. Pay your mortgage
Check to see how much and how often you are allowed to make payments at once for your mortgage. Just one extra payment per year can lower your interest payments significantly during your mortgage period.
6. Pay off the debt
If you have large debts, either credit card debt or other loans, then paying off your debt will always be a great idea.
Remember, you do not need to redirect all your bonuses to one area. You can divide it and assign a certain percentage to each of your financial priorities. Setting a certain percentage for "fun money" can be a great idea too. Zimmerman added, "The key message from me, as a money coach, is to use your bonus in a way that you feel good about and do something that gets you enthusiastic about your overall financial life."