Bonuses, expected or unexpected, provide your bank account with a nice cash infusion. Deciding what to do with that extra money can be complicated. Lucky for you, we spoke to the experts on how to maximize that bonus to get the most out of your extra cash.
When deciding how to use your bonus, money experts suggest considering the following wealth-building tips to help increase your bonus power.
#1 Build an Emergency Fund
Emergencies, such as your car breaking down or your roof springing a leak are bound to happen. Having an emergency fund is a great way to prepare for those unexpected, seemingly inevitable, situations.
They also create a cushion in the unfortunate event that you lose your job, are unable to work due to illness or injury.
Experts recommend saving between 3-6 months of living expenses in an interest-bearing account, such as a money market account or GIC, which pays a higher return than a traditional savings account and can be liquidated easily.
#2 Pay Down Double-Digit Debt
Credit cards, home loans, car loans, and student loans often come with double-digit interest rates, which can make them nearly impossible to pay down if only making the monthly minimum.
Your bonus provides a great way to put a dent in high-interest debt or to simply pay it off altogether. This will increase your net worth by decreasing the debt you owe. It can also free up extra money that can be used for other things.
Begin with any debt that has an interest rate greater than what you can earn at a financial institution, or about 7%. Historically the stock market has generated returns about 7%, so decreasing any debt with an interest rate of 7% or more would be a good place to start.
#3 Save for Retirement
When you contribute to a tax-advantaged retirement account such as an RRSP, a government-sanctioned saving account, each dollar you contribute can be subtracted from your income, effectively reducing the amount of taxes you pay. For instance, say you made $45,000 and you contributed $5,000 to an RRSP, you will only be taxed on $40,000.
You contribution limit is fixed at 18% of your previous year’s reported income up to a maximum of $26,230. As an added bonus, any unused contribution room is automatically rolled forward to the next year.
Furthermore, your benefits also grow tax-free, which means as long as your money remains in the account, you do not pay taxes on dividends, capital gains, or interest earned.
#4 Invest in Long-Term Assets
Investing when you are young provides plenty of time for your money to grow, which can then be used to have a nice retirement.
Once you have contributed the allowed maximum amount to a tax-advantaged retirement account, such as an RRSP or TFSA money experts recommend moving onto a personal investment account.
A personal investment account is similar to an RRSP or TFSA although it does not offer the same tax benefits. However, it does offer a chance of making a greater return than simply putting your assets in a traditional savings account.
#5 Donate to a Good Cause
Not only does donating to a good cause make you feel good, but it can also decrease your income tax. As long as the donation is made to a charity or non-profit organization that is registered by the government.
Typically, you can receive a credit for all charitable gifts to registered organizations, up to 75% of your net income, just be sure the receipt includes the date, amount donated, the charity’s name and registration number, the serial number, the donor’s name, and a signature on behalf of the charity as proof.
Furthermore, some or all of your contributions may be carried ahead for up to five years to take advantage of a higher tax credit.
#6 Splurge a Little
Provided you have the 5 steps above in check you may consider using part of your bonus to have a little fun. Research shows that the feeling of satisfaction after purchasing an item with a bonus may lead to increased performance. This can effectively lead to a promotion or larger bonus in the future.
Experts suggest spending no more than 15%-20% of your bonus on something fun, provided you have no big upcoming expenses.
In the end, a bonus is just that, a monetary gift that isn’t given often, so treat it with respect by spending it wisely for a lasting impact. You’ll be glad you did!