Getting a bonus or any big chunk of money – whether it is a gratuity, ESOB, or a big payment on an investment – is a huge validation of the hard work you’re doing. It’s exciting, but it can also be confusing and worrying. Should you use it to upgrade your lifestyle, clear your debts, or invest it over the long term to grow your wealth? The thing you need to keep in mind is that the strategy here is the same as with any lump sum of money you have.
Our advice is the same – and it’s not ‘now go buy that expensive car you have been wanting’.
Let us look into what you need to do.
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Set some money aside – but separately
When it comes to receiving any form of windfall – be it a bonus, an inheritance, or a generous birthday gift – your first move should be to transfer the money out of your current account.
This makes it harder to spend the money on everyday living since lumping together your savings and living expenses in the same account is a surefire way to fritter away wealth. It also means you’re not lumbered with the paltry returns offered by current accounts, with their rock-bottom interest rates.
It’s a good idea to open a new account – either a savings account, an ISA, or an account with an investment platform like Sarwa, which offers much better rates than a typical bank account.
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Create an emergency fund
Life isn’t always straightforward, and there can be ups and downs along the way. Before making any big decisions regarding your bonus, it makes sense to establish a safety net, with enough cash to cover at least 3 months of expenses.
If you do run into financial problems, having a backup plan in place will give you time to resolve underlying issues and restore your income without disrupting living arrangements or lifestyle.
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Eliminate short term debt
At some point, most of us will take out a mortgage in order to buy our own home. Some of us have high interest credit cards. But short-term consumer debt – the kind that charges high interest rates – is toxic. It can create huge anxiety, not to mention harming your ability to build wealth over the long term. The sooner you can reduce it, the better.
Minimising expensive short term liabilities charged by credit cards, student debt, overdrafts and consumer purchases reduces your monthly outgoings and increases the amount you can invest. It also puts you in a safer position should you encounter financial problems going forward.
So, before you start to think about investing, use your bonus to pay down high yielding debt. A good rule of thumb to apply here is to seek to eliminate debt with an interest rate that’s higher than what you could earn on that money somewhere else (around 5% is a sensible number).
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Play the long game
Once you’ve established an emergency fund and paid down expensive short term debt, it’s time to think long term. Your bonus provides an awesome opportunity to accelerate your wealth with a large upfront boost.
Retirement might seem a long way off, but you’ll need to get started with investing early on in your career in order to generate enough assets for a comfortable retirement. A recent survey revealed that the majority of UAE expats don’t have realistic retirement plans for securing a comfortable lifestyle when they finish work. But by starting early, you benefit from the magic of compound interest in growing your assets over time.
When you receive your bonus, it pays to sit down and factor it into your long term financial goals. If you don’t already have one, it’s a good idea to make a Systematic Investment Plan (SIP), whereby you invest a fixed sum each month on a consistent basis. This will help you to stay on track, average out costs and benefit from compounding. Since your money remains invested in the market, it has the ability to steadily grow over time.
Sarwa can help with this. Our online platform automates the investment process for you, using tried and tested techniques such as risk tailoring, global diversification, dollar cost averaging and automated rebalancing. By doing so, we’re making high-quality investments accessible and affordable, so get in touch if you’d like some advice on getting started.
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Treat yourself
A bonus is a wonderful thing. Once you’ve taken steps to secure your term financial position, why not treat yourself by spending a small portion of your bonus on something fun?
You could buy a holiday to rest and recharge before charging at the next bonus round! You could get a new wardrobe for work. Or, you could put your bonus towards a deposit on a house. You’ve earned the right to reward yourself – smartly – so go ahead and enjoy!
Ready to invest in your future?