What I think you should do with your Bonus
Ming Feng from Seedly asked me if I have any advice for what people should do with their bonus.
So I thought I will share the answer I gave to you guys and gals as well.
I often felt that I am in no position to tell you what you should do with your money.
You spend the past year slogging to get this reward, so I think you should decide what you want to do with it.
However, if you are looking for ways to allocate your bonus in a fundamentally sound manner, then perhaps I can share some stuff.
Certain Bonus versus True Performance Based Bonus
How you allocate your bonus depends on the certainty of the bonus.
For some people, their bonus is “part of the package”, either negotiated on an annual basis or due to the historical bonus nature within the company.
For my case, I been in a “lifer” in the company.
I started from being anxious about how much bonus I will get initially, to the phase where I would work hard and anticipate how much that would boost my bonus to resigning that the bonus within the company is rather fixed.
So relatively speaking I have a higher certainty to my bonus than some others. I do not work in civil service but perhaps those that are in government linked companies will agree with me. There are also the folks that work in banks or organizations where their bonus is rather fixed as well. The bonus is a very small portion of their compensation. That aids in the planning as well but in different ways.
With certainty, you can do longer term planning.
With uncertainty, longer term planning becomes difficult.
Rely Less on Your Bonus for Lump Sum Payments
Many people I know pay their insurance premiums in one lump sum and typically at the end of the year. So they rely their bonus for this.
If you move to a company that has low or uncertain bonus then, how do you pay for your annual insurance premium?
Relying on your bonus to pay expenses that is mandatory is unsound.
What you should do is to break the lump sum premium to 12 months and deduct this monthly from your disposable income, save it so that at the end of the year you can pay it off.
The envelope budgeting system is meant for situation like this.
For some, you have stayed in a company for some time , your bonus is more predictable, it is more appropriate to pay for lump sum expenses with your bonus.
Allocate your Bonus to Higher Priority Goals
I allocate my bonus in different ways based on my highest priority goals in the past 13 years of working.
Less you think I earn a lot of bonus, the above table is the part of my performance bonus (excluding 13 month ‘bonus’) that I allocate into my wealth machine(s) (read what are wealth machines)
The first phase started when I started working till 2011. I had an idea how much wealth I wish to accumulate by 35 years old.
As I did not know how much bonus I will get (since I was new to working), I put a fixed monthly amount and 100% of my bonus to wealth building.
The second phase started in 2010 and ended somewhere this year in 2017.
I realize that there are other areas of life that you need to fund. In terms of the absolute amount that I put away monthly to wealth building, I managed to see a sizable amount that I will conservatively put away annually. This is because the salary have grown over the years such that if I put away the cash flow monthly to wealth, I don’t need to rely on the year end lump sum.
I took the foot off the pedal with regards to my bonus. I only allocate my AWS (or 13th month bonus) and 1 month of my performance bonus to wealth building.
The bonuses goes to other areas of life.
The third and last phase happen recently.
Life takes a turn, and I realize life you want don’t cost that much. Since you do not know what to do with excess capital, you funnel 100% back to your wealth portfolio so that it can accumulate and general future potential wealth cash flow.
If your priorities are less costly and less money focus, you build up more security for the future for your family and yourself..
The key is to focus on your priorities and evaluate that in a portfolio of different priorities.
If you truly felt that you only live once and do not know how long you will stay on this Earth, spend all your bonus with your family, and cherish that experience.
But don’t come back crying to someone else when you realize that money could have been better spend for some future spending.
Many people have that regret not saving their bonus because they do not sit down and reflect well what are the goals now and future goals that need funding. This is both a competency issue but also that in life, you cannot plan for everything. You cannot anticipate how you feel and need in the future 100%.
When you save part of your bonus, without a goal, you are buying financial security.