If you’re lucky enough to have a job that makes you eligible for a year-end bonus, you probably eagerly await that extra, year-end deposit into your bank account. And you might already be dreaming about how great that new flat-screen television is going to look and sound in your rec room. But to really take advantage of your bonus, some simple financial planning is in order.
1. Don’t count your chickens before they hatch
Your bonus may seem like a sure thing, and you can make plans for what to do with it based on the amount you expect to receive, but don’t go spending any of it until it’s yours. If, for some reason, you don’t get your bonus one year, you’d hate to find yourself suddenly in debt.
2. Factor in income tax
When you receive your bonus it’s going to be significantly smaller than what your manager quoted because of income-tax deductions. And, if your bonus is bigger than your regular paycheque, it may be taxed at a higher rate. The good news is you may have some of that tax returned to you after you file your income tax return in the spring.
3. Formulate a plan and stick to it
Once you know exactly how much you’ve received, you can make some concrete plans for your bonus money.
“Treating it as a windfall and blowing it on whatever you want is a mistake,” says Mike Holman, the Toronto-based writer of the Money Smarts Blog. “It’s an easy thing to do because it’s a separate, special paycheque. 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 Yellowknife-based money coach and blogger, agrees that people need to have clear intentions about 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 exactly how she saved enough money for the down payment on a Vancouver condominium a number of years ago. If it weren’t for her clear goal of investing in a condo, she’s sure she would have “frittered the money away.”
4. Top up your registered retirement savings plan (RRSP)
Most Canadians with an RRSP have plenty of extra contribution room. So directing some of your bonus toward your RRSP is a great decision, and should also yield a higher tax refund next spring. Some workplaces arrange bonuses so that if an employee contributes to his or her RRSP, income tax is not deducted and the entire bonus gets invested. If your company offers this choice, it’s a great option to take advantage of.
5. Contribute to a tax-free savings account (TFSA)
In 2013 and 2014, you can invest up to $5,500 per year in a TFSA, where your future investment income and capital gains won’t be taxed.
6. Pay down your mortgage
Check to see how much and how often you’re allowed to make lump-sum payments towards your mortgage. Just one extra payment per year can decrease your interest payments significantly over the life of your mortgage.
7. Pay off debt
If you’ve got outstanding debt, whether it’s high-interest-rate credit card debt or lower-interest-rate student loans, decreasing your debt is always a good idea.
Remember, you don’t have to direct your entire bonus to one area. You can divide it up and designate a certain percentage towards each of your financial priorities. Reserving a certain percentage for “fun money” can be a good idea, too.
“The key message from me, as a money coach,” says Zimmerman, “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.”
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