As we quickly approach the end of the financial year, talk of salary increases and annual bonuses starts to emerge.
It’s around this time when we start thinking about how hard we’ve worked all year and whether our employer will have a nice surprise for us, come 1 July, to reward our hard work.
For most of us, however, salary increases will be relatively small this year and bonuses will be a rarity, awarded only to the highest performers.
But if you happen to be one of the lucky ones and receive a generous cash bonus from your boss this year, you need to know how to make the most of it.
Don’t spend what you don’t have
The first thing you need to work out is exactly how much you’ll receive, after tax.
“Be aware of the bonus after tax. Just because your employer might say you’re getting a $10,000 bonus this year, that might be the gross amount and tax needs to be taken out,” says Laura Menschik, a financial adviser at WLM Financial.
You also need to be aware that the bonus you receive may bring you into the next tax bracket, meaning you’ll pay a higher rate of income tax. Plus, your bonus could also include a contribution to superannuation, so check with your employer regarding your net bonus payment.
Reduce your debt
Once you’ve worked out how much you have to play with, it’s a good idea to eliminate any non-deductible debt you might have, like credit card debt or personal loans.
“Get rid of that personal debt first and foremost or reduce it depending on how bad your credit card debt is,” says Menschik, emphasising the importance of removing or reducing non-tax deductible debt that also attracts a high interest rate, like credit card debt.
“If you’re getting about six or seven grand and your credit card debt is $20,000, it will only put a dent in it. But at least it will put a good dent in it.”
Now that you’ve taken care of your personal loans, it’s time to tackle your mortgage. To do this, Menschik suggests putting some of your bonus into an offset account.
“You can put that money in a separate savings account where the interest goes to paying off part of the mortgage, but you actually have that as accessible, should you need to draw on it,” she says.
And paying off a chunk of your mortgage, adds Sarah Riegelhuth, the managing director of Wealth Enhancers, will save you interest and get you closer to your goal.
“The interest is not tax-deductible so reducing that debt is a great option,” she says.
Your investment options
If you don’t have any personal debt or you’ve paid it all off with money to spare, there are a number of different ways to invest your bonus money.
One option is to put it into your super.
According to Riegelhuth, while it depends on your age there are tax benefits to be gained from putting your bonus towards super, rather than in your bank account.
But for Menschik, while putting your bonus into super is a great idea, it may not appeal to the 30-somethings who are more focused on the short term.
“It’s a great idea for those who are close to retirement, but to tell somebody who’s 30 to top up their super, when they still have a lifetime … it’s not likely to happen,” she says.
If this sounds like you and you’re not thinking too far ahead, Menschik suggests putting your money into a high yield bank account.
This is a good idea if you’re saving for something in the short term – say, within the next three years – like buying a house, taking a year off to travel, doing some extra study or starting a new business.
“If you’re looking to put the money aside, look at putting it in something that will give you a reasonably high rate of return,” says Menschik. “I know interest rates are pretty down at the moment but there are still some that are better than others.”
If you’re thinking longer term, it’s up to you where you choose to put your money. But the most important thing, according to Riegelhuth, is to understand exactly what your investment goals are, before you go ahead and invest your money.
“Having that lump sum can be a great way to get started,” she says, suggesting a managed fund or SMA (separate management account), or a diversified share portfolio.
Whether you put your money in shares, a managed fund or diversified share portfolio is, according to Menschik, an individual thing and depends on what you feel most comfortable with. But whatever you do, make sure you think long term.
“I’m not saying you shouldn’t have a good night out and celebrate. Reward yourself somewhere along the line because you’ve obviously worked hard for it,” says Menschik.
“But let that bonus work hard for you. You’ve worked hard for the bonus so let that bonus work hard for you.”