It’s the most wonderful time of year! The holidays? Um, sure. But I’m actually referring to year-end bonus time! Many companies pay out a bonus around the end of the calendar year. Because of the time of year, with holiday cheer and overeating, it’s easy to get carried away with spending as well. I find this especially so since we have just been conditioned to spend during Black Friday and buying presents for family. I get into the habit of just whipping out my credit card when I see something good, especially since the bonus is in the back of my mind. I justify everything with “I have extra cash”.
Like over-indulging on yummy treats, I, like many others, wake up in January regretting my choices. By squandering the year-end bonus, I would be missing out on some opportunities that I don’t have during the regular pay-cycle.
So the question is how should we spend our year-end bonus?
Here is what I’m spending my year-end bonus on:
Topping up Retirement Accounts.
Because retirement accounts are tax-deferred, contributions into these accounts will result in tax credit when I got to file my taxes in April. The Government is returning the amount that was taxed collected by my employer and paid to the government. Because the government over-collected, they will now credit it back to me.
While I contribute to my retirement account throughout the year with regular paycheck deductions and bank transfers, I am unable to reach the maximum contribution limit this way. But for many, cash flow might be too tight during the regular paycheck cycle to even make regular contributions. The lump sum at year-end bonus time is a good opportunity to catch up or top-up.
Making Charitable Donations.
I’m pretty lucky, I live a pretty comfortable life. I don’t have to worry about where I’m going to get my next meal or if I have to choose between heating my place or other necessities. Even so, I feel that money is tight around this time of year with presents and extra costs and family dinners. For others who are not as fortunate as I am, this is an especially challenging time of year.
For years, I participated in charitable programs that provided for lower-income families. I also make several donations to charitable and not-for-profit organizations that help fight poverty and injustice at home and across the globe. Not only is it a feel-good endeavour, but these donations are also tax-deductible. So like the contributions to the retirement account, this action will also reduce your taxable income when you go to file your tax returns.
One-off Splurge.
So far, we’ve spent our bonus buying gifts for our future selves and to others. If that doesn’t make you feel satisfied and you are still itching to treat yourself, now’s the time. Yes, I’m giving you permission to treat yourself, guilt-free. I know we can always save more, but sometimes, that actually backfires.
So, I take out a certain amount of money and set it aside for a splurge. I literally physically remove it from the rest. This amount can be a percentage of the bonus or it can be a specific dollar amount. I usually settle on a dollar amount.
Last year, I took out $500 and spent it on a state-of-the-art pair of noise-cancelling headphones (after hours of research) and it’s something I have enjoyed every day this year. In years past, I had bought $400 worth of gift certificates to Sephora for me to spend impulsively throughout the year. I don’t believe in depriving myself and getting all resentful as I know that’ll just sabotage my progress later on.
Another thing that I’ve sometimes spent with my year-end bonus is to pre-fund several expenses I know I incur during the year. They might actually be haircuts, my boyfriend buys a package of haircuts at the local barber at year-end. They are usually running a special deal and it locks in a price even if there is a price increase later.
But What About…?
At this point, many people might be wondering should I be paying down debt, either student loan, credit card or mortgage. Or instead of making a Retirement contribution, maybe make a contribution to my Tax-Free account instead? Yes, do all the things. But I always do it in a specific order.
I always make the contribution to my retirement account first and try to get as close as I can to maxing out the contribution allowance. Then charitable donations. These 2 help me to reduce my taxable income for the year. Because income taxes are withheld at source by my employer, I can get a larger tax refund when I file.
If my year-end bonus was ample enough to have money left over after the 3 items above, I would use it to make a contribution to a tax-free savings account or to pay down debt. I don’t take those actions first because I want to stretch my bonus dollars as far as I can. It makes sense for me to use it on items that have the greatest tax impact. Then when I get my tax refund in April, I use that “before tax” money to contribute to a tax-free savings account. That means that those dollars will grow tax-free for the rest of my life. Well, until I take it out. That’s pretty amazing.
Get Those Receipts!
If you are lucky to get a year-end bonus, the time to plan is now, before it’s deposited into your account. Once it is deposited, you have the 2 or 3 steps you know you need to take right away and can put that plan in action.
Calculate how much you can contribute to your retirement accounts without penalty and write that number down! Next, which charities are close to your heart & values? Fill out the donation form now, just don’t send it in until you get the money. Finally, buy something for yourself that you’ll enjoy throughout the year. That something should be obvious enough in your day-to-day to remind yourself that you’re not always sacrificing.
After those 3, go ahead and pay down debt and contribute to your tax-free accounts. Don’t forget to make a reminder for yourself that any tax return you get is earmarked for these 2 items as well.
This way, you go into the holidays with a plan and you can rest easy, knowing you are starting 2020 on the best foot possible.