Making the most of your annual bonus

"I can’t remember" is the answer Frank Magwegwe – Founder & Managing Director of Thrive Financial Wellness gets most often when he asks people this question: When was the last time you were extremely happy with how you spent you bonus? Many people only receive extra money or a bonus once a year. But this "windfall" has a way of vanishing as quickly as it hit their bank accounts. The best way to manage how to spend this money is by determining what things should be done with it, and those that should not be done with it.

What not to do with your annual bonus
The biggest challenge with bonuses is that, most often emotions get the better of people when they suddenly have extra cash. Avoid splurging on big ticket items at all costs. No matter how attractive the sale or how essential the product seems, if you have not been saving towards that particular big ticket item for some time, hold off from purchasing it with your annual bonus.

What to do with your annual bonus
Consider a careful plan on how to use the bonus. First, set aside a part of the bonus as a reward for yourself. Second, treat the bonus as an opportunity to get your finances in order, after all the bonus is a once in a year "windfall".

How would one go about this?
Start by establishing an emergency fund or if you have one, to top it up. Financial wellness experts recommend that that you set aside three to six months’ worth of take-home pay in cash as an emergency fund.

There are a number of reasons why building an emergency fund takes precedence in what to use a bonus for:
  • It allows you to meet unexpected expenses without building up personal debt or disrupting the flow of cash used to fund other needs and goals.
  • It’s the first source of cash to cover excess related to car and home contents insurance claims.
  • It is the foundation for financial wellness

Once the emergency fund sorted, you can then consider using the bonus for:
  • Reducing unsecured, credit and retail store debt.
  • Put the money into discretionary retirement savings – as an extra contribution into a retirement annuity for example.
  • Investing the money.

Finally, a good way to think about how to use the bonus is whether the use adds or detracts from net worth, a good measure of financial wellness. Net worth is the amount by which assets exceed liabilities. A consistent increase in net worth means assets are growing faster than liabilities.

You might also want to read this article on money mistakes to avoid.