5 Strategies for Your 13th Month Pay & Bonuses
Published January 2018
Written by Shawn Yap CFP
Performance bonus, higher commission, year-end bonus…are all mini-windfalls that we don’t usually think much about. All these contribute to the non-guaranteed and variable part of your total income, which could be substantial for some of you. On top of your regular saving and investment programs, here are some ideas on what to do with these extra resources:
Pay Yourself First
As your income increases, there is a natural tendency for expenses to increase as well. This is the effect of Parkinson’s Law. In Brian Tracy’s 21 Absolutely Unbreakable Laws of Money, he said, "Financial independence comes from violating Parkinson’s Law." I concur that lifestyle consumption is one of the enemies of financial independence. Although the guideline for investment ratio is 20% of your income, a savings ratio of 50% will almost guarantee you a comfortable retirement. If it has been challenging to achieve that, you should save and invest more than 50% of your total bonus every year to make up for it.
This is the basics of money management 101. You should keep a minimum of 3 to 12 months’ worth of expenses in liquid assets. Liquid assets include bank deposits, Singapore Savings Bond and Inflation Hedgers (Opportunity Fund). Keeping anything above 6 months’ expenses in bank deposits is considered cash hoarding. The invisible depreciator called inflation will reduce the value of your money every year - guaranteed. If inflation is 3%, you are losing $3,000 every year for every $100,000 that you hoard!
Pay Off Bad Debts
Bad debts are high-interest loans. Credit card and personal loans are two of the worst. Never borrow from the legal 'loan sharks'. Be aware of the difference between a flat interest rate and an effective interest rate. The effective (real) rate is close to twice that of the flat rate. In addition, make sure that your debt ratios are within guidelines. Long-term instalments like mortgages and car loans should be less than 35% of your income and your total debts should not exceed 50% of your total assets.
Reduce Income Tax
It is never too early for next year’s tax planning. There are many income tax reduction strategies. They include voluntary CPF contributions, CPF Cash Top-Ups and Supplementary Retirement Scheme (SRS). Despite their obvious advantage, there are also different disadvantages to each of them. Everyone has a unique tax relief structure, so it is better to discuss this with your wealth adviser to minimise your income tax. Do note that income tax evasion is illegal.
Boost Your Wealth
As the 13th month pay and bonuses are variable cash flows, you should invest them on an ad-hoc basis to grow your wealth every year. Plans that offer a one-time lump sum amount are suitable. For the Secured category, most plans should break even in 5 to 7 years with higher yields correlated to longer time frames. For the Opportunity category, both the Inflation Hedger and the Passive Income portfolios are suitable for long-term growth.
Besides the financial tips above, there are other important forms of wealth. Remember to invest in your emotional, mental and physical well-being. They are priceless!
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