As we enter the last quarter of the year, you may shortly find out whether you will be getting an end of year bonus.
If getting an end of year bonus is a regular occurrence for you then you may already have the money earmarked or may have already spent it!
But if the end of year bonus is something you do not expect or you don’t take for granted, then you may not have thought yet how best to use it.
The workplace is changing.
- Jobs are not secure for the long term (i.e. jobs for life).
- There’s no certainty your company is going to be around in the next 10 years.
- People are seeking a career change more often.
So an end of year bonus is going to be less and less of a sure thing.
When it comes to looking after your future and living the lifestyle you want, the thing that is going to make the biggest difference is not investment returns, how much tax you save or even how much you earn.
It’s how much you contribute to your future self’s pot.
The extra you add to that pot for future you is going to make a big difference, and the more you do earlier increases your chances of financial freedom.
So before that end of year bonus gets spent…..
Here are 5 ideas for that end of year bonus.
#1 – Pay off debt
If you have outstanding debt on credit cards now is the time to get it paid off.
No savings product or investment plan is ever going to be able to grow your money quicker than a credit card can take it away.
If you have a mortgage you could also use the end of year bonus money to pay off all or a significant chunk of your mortgage, but I would urge you to read my article “Pay Off The Mortgage Or Invest” first as financially this may not be the optimum thing to do for you.
#2 – Build a savings buffer
Some call it an emergency fund, some call it a freedom fund.
This is what you need:
- A sum of money in an easy access cash savings account.
- The amount should be equal to at least 6 x your monthly spending.
A recent study from Zurich found that a third of brits have no savings to fall back on should they suffer a sudden financial shock or loss of income.
Not having a savings buffer is going to mean you either get into debt or sacrifice your future lifestyle prospects by dipping into your longer term investments early.
Don’t worry about interest rates so much with your savings buffer as this money is not there to grow and increase your options for your future lifestyle. It’s there to protect your longer term investment portfolio. To avoid you having to touch your longer term investment portfolio.
#3 – Put it straight into your pension
One of the best ways to save is to make it automatic and one of the first things deducted from your payslip after tax. This avoids you ever seeing the money and getting used to it sitting in your bank account.
You could ask your company to deploy what’s called salary sacrifice and ask that your bonus is paid straight into your pension.
If you receive your end of year bonus into your bank account you are going to pay Income Tax on it. In fact the end of year bonus might just be the thing that tips you over into a new tax band and therefore you pay even higher tax.
By sacrificing your bonus immediately into your pension you don’t get taxed on it. You save on paying National Insurance to and so does your employer.
But a word of warning. The amount you can contribute to pensions has changed in recent years and has become quite complex, so seek financial advice before doing this as you could end up paying more tax than you save.
If you are already at the limits of what you can put into your pension then see if you can add to your partner’s pension. Again there are limits to what you can put in so seek advice first.
#4 – Consider an alternative savings plan
If you have hit the contribution limits for you and your partner’s pension you could always consider an alternative investment like a Stocks and Shares ISA.
Whilst you won’t receive any tax relief on contributions you make, you will never pay any tax on money earned inside the ISA and you won’t pay tax when you decide to withdraw from the ISA.
At the time of writing (2018/19 tax year) you can contribute up to £20,000 per year into an ISA and there’s nothing stopping you from contributing an additional £20,000 to your partner’s ISA too.
#5 – Invest in yourself
If you feel your plans are on track and you already contribute adequate amounts to your retirement portfolio then a final idea for your end of year bonus is to invest in yourself.
This could mean:
- Take a course.
- Buy a load of books.
- Start your own business.
- Switch jobs.
Like I mentioned earlier, nothing is going to impact and increase your future prospects more than what you put in.
You are your biggest asset and what you do to grow yourself will add far more value.
So there you have it, 5 ideas for that end of year bonus.
Even if none of these ideas are right for you at least use your end of year bonus intentionally. Don’t receive it, leave it and before you know see that it’s gone without being really sure what you spent it on. Your future self will be kicking you.
If you would like a chat to discuss some strategies for your end of year bonus then please give me a call on 01908 592544 or send me an email carl@rtsfinancialplanning.co.uk. Nothing would please me more than helping you get at least one step further to achieving the lifestyle you desire.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
