Putting #MeFirst: Smart Ways to Spend Your Bonus

By Ryan Ong, 22 March 2018 6208

Congratulations on receiving your bonus! You may be tempted to spend it right away, but there are ways you can invest your bonus, without having to deprive yourself. You can put your future needs first and still be able to give yourself a treat. Here's how in 4 simple steps:

Step 1: Divide your money into buckets

The least stressful way to manage your money, is to divide your income into three "buckets". These are savings, investments, and expenses (this includes debts that you need to pay off).

Once you fill the first the two buckets (savings and investment), the rest can go into, well, living life to the fullest. This allows you to set aside enough for your personal needs before spending on others and things in life that are important ot us.

Use a simple 30/30 rule for savings and investments. That means the first 30% of any income goes into savings, and the next 30% goes into investing. The remaining 40% can be used for whatever you need to buy.
For example, say your year-end bonus is $4,000. You would set aside $1,200 for savings, and $1,200 for investing. The remaining $1,600 can be used for a vacation, to buy the latest iThingy, go on dinner dates, however you wish. Deciding on the percentage of savings and investments you will put aside before getting your bonus will help you resist the temptation of spending excessively.

The key is to pay yourself first. Put the necessary money in savings and investments, before you enjoy guilt-free spending.


Step 2: If you have outstanding debt, consider paying these down before investing or spending

Most forms of unsecured loans (e.g. credit cards and personal loans) will grow much faster than your investments. Credit card debt compounds at around 26% per annum, while personal loans compound at between 6-9% per annum. As such, you may want to consider either (1) paying them off completely before investing (if you can), or (2) spending less, and dedicating an additional 20% to debt repayment.
Let's go back to that $4,000 bonus. If you have an outstanding personal loan of $1,200, you could consider the first option: Save $1,200, pay off your debt of S$1,200 (instead of investing), and spend the rest of the money.

But what if you have a larger debt that you can‘t pay off at once, such as $10,000? As an alternative, you could save $1,200, pay down your debt by $2,000 (this is the initial 30% allocated for investment, plus an additional 20% of your bonus) and spend the remaining $800.

Note that you should always save while paying down your debt. This is because, if you have no savings during an emergency, you could end up being forced to take another loan (thus undoing your debt repayments).
When paying off your loans, always pay from the highest interest rate to the lowest. In sequence, these are:
  • Credit card loans (24-26%per annum)
  • Personal loans (6-9%  per annum)
  • Education loans / Renovation loans (Around 5% per annum)
Home loans should always be paid last. The interest rate is the lowest among your loans (2.6% per annum for HDB loans, and an average of 1.8% for bank loans). If you use a large amount of money to repay your home loan, and later find yourself short on cash, you cannot easily take money out of your home to pay your bills. This could force you into using higher interest personal loans.

Step 3: Pick the right asset, for the investment "bucket"

So you've set aside 30% for investment; now all you need to do is pick the right asset.

It's important to speak to a qualified financial advisor and pick something that suits your financial needs and risk profile. We'll let you in on a secret: personal finance is as much about psychology as it is math.

There's no point picking a high return, high risk investment, if you can't sleep from all the stress. You need to pick an investment that matches your risk appetite, and also meets your financial goals. A financial advisor can conduct a risk appetite assessment, to filter out the assets that are wrong for you.

If you are a safe investor, you may consider cash equivalents instruments such as Fixed Deposit Accounts. These accounts pay a fixed interest rate of between 0.05% to 1.85% per annum, based on the amount of the deposit made. This is a fixed amount that does not fluctuate with market conditions. Another option is fixed income assets such as vanilla bonds. Corporate bonds typically provide returns of between 4 - 5% per annum.

Fully backed by the Singapore government, Singapore Savings Bonds is a low-risk savings instrument that earns you interest that increases over time. By holding your Savings Bond for the full 10 years, you will receive an average interest per year that matches the return from 10-year Singapore Government Securities yields (generally between 2%-3%). The principal amount you have put in is guaranteed and you can redeem your bonds any time if you need your cash back urgently.

You could also grow your money in a savings plan such as Income’s Gro Sure Saver, which allows you to enjoy guaranteed yearly cash benefits from the end of the 2nd policy year onwards (if all necessary terms and conditions are fulfilled). With a wide choice of premium terms of 15 to 25 years available, you will be able to choose a premium term that you’re comfortable with. Most importantly, it also provides coverage for death, terminal illness, and total and permanent disability (TPD before the anniversary immediately after the insured reaches the age of 70). as you save.
If you are a younger investor however (under 25), you have a longer investment horizon - you should aim for long term capital gains, which can beat the inflation rate of 3% per annum. 

If you have a higher risk appetite, you can consider equities, or Index-Linked Exchange Traded Funds (ETFs).  Many blue-chip stocks, or ETFs such as the Straits Times Index Fund (STI ETF) allow you to receive dividends based on their performance. ETFs and equities can also be liquidated quickly, if you need the cash urgently.

If you are not confident in managing your own portfolio, consider Income’s VivaLink, an investment-linked plan (ILP) that lets you build you wealth from only $100/month. This plan comes with the flexibility to make ad-hoc top-ups and fund switches and each fund is continuously monitored by a team of experienced investment professionals. You will also get protection for death and total and permanent disability (TPD before age 70), allowing you to stay protected while you invest.

Find out more about VivaLink here.

Step 4: After putting your future self first, give your present self a little treat!

Here's a special tip on getting the most bang from your buck: Research has shown that people who spend money on experiences, rather than things, become happier.

An expensive pair of shoes might make you happy for a month or so...but it probably won't compete with the memory of a life time, such as seeing Mount Kilimanjaro over the Serengeti, or walking the Great Wall of China.

You can also consider spending on taking up a new skill like playing the ukulele, painting, taking up Mixed Martial Arts, and so forth.

Look beyond online shopping and product catalogues; there are better ways to treat yourself than just retail therapy.

Armed with this knowledge, go ahead and put your bonus to good use.


Important Notes:
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income insurance advisor.

This advertisement has not been reviewed by the Monetary Authority of Singapore.