What should you do with your bonus (or your tax return)

We don’t all get bonuses, but if we do it’s always a good day. It is pretty similar to when you get your tax back (if you do actually get tax back). What do you do with your bonus or tax? Here are my (financially responsible) tips for your bonus.

1)   There is nothing wrong with treating yourself out of your bonus on something a little bit extra, but spending the whole lot is not going to be worthwhile in the long run. Allocate a percentage or certain dollar figure that you are willing to splurge with, and the rest can be put to other areas.

Remember that in most circumstances your bonus will be taxed at a higher or the highest marginal tax rate (up to 45%) meaning that the amount you actually receive in your bank account could be substantially lower than your actual bonus amount. Before you make any buying decisions, make sure you know the actual amount that you will be getting. It is likely that you will get more tax back later in the year, but be aware of the lower initial payment.

2)    If you have debt, whether it is credit card, home loan, car loan, or personal loan, then at least 50% of your bonus should be going towards this. If you owe money, then spending the whole bonus on ‘fun stuff’ isn’t really justified.

3)    If you don’t owe money, then I would ensure that your emergency fund has a healthy balance. My general tip is 3 months worth of salary in cash ready to go just in case you are ever in a bind. This should be kept in an account that you can’t get access to via an EFTPOS card or in an offset account on your home loan. An online account attached to your normal savings account is also a good option.

4)    If your emergency fund is nice and healthy then maybe you should consider using thelump sum to buy into an investment. A managed fund or an ETF may be a good option. Usually the purchase price is a minimum of $20,000 or so to buy in, after that you can usually make continued contributions for as little as $100 a month.

5)    Depending on your personal situation and the restrictions within your workplace, you could consider salary sacrificing a portion of your bonus into your super fund. That will reduce the taxable income, meaning you pay less tax on what you ultimately get, and has the added benefit of bumping up your retirement nest egg.

What do I do? Well any bonuses we get go directly onto our home loan (offset account), that’s it. There are no special splurges, or celebratory dinners. We high five because we have just paid a few months off of our mortgage and move on with our lives. I have previously written about my budget and the fact that I accommodate for pretty much everything I need and most of what I want. When a cash injection comes our way, the best thing for me to do is pay down the home loan. The quicker it is paid off the quicker it frees up a whole heap more money.

Whilst I love a new handbag as much as the next girl, I am looking at the end game here. That is, buying a larger and nicer house, and retiring when I want to, and not having to slog it out until I am 75.

Do you have any other suggestions for your bonus? Do you celebrate or buy yourself a treat? Golf clubs anyone?

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Financial Planning, Superannuation and Cara Brett