Published February 26, 2019 • 5 Min Read
Not to spoil your fun, but on behalf of your future self, there are a few things you might want to consider doing with your bonus so you’re not wondering where it all went a few months from now.
While these may not be the most exciting ways to use a bonus, these four options may help transform it into a gift that keeps on giving.
1. Make a Dent in Your Debt
Have a lingering credit card balance? Student debt? Car loan? Think about putting at least some of your bonus against any debt you’re carrying, so that it doesn’t stick around longer than it needs to. A good rule of thumb is to start with the highest interest debt first, and work your way down.
Think about it. By paying off your credit card, you might be doing away with a monthly payment that’s been hanging over your head all year. That frees up cash you can use for something else. And if it’s longer-term debt — like your student loan or even a mortgage — you might save hundreds of dollars in interest if you make a lump sum payment now. Breathing room is a good thing.
2. Kickstart an Emergency Fund
Life can be bumpy. Washing machines break down, cars need new brakes, or something unexpected comes up such as a trip with friends. It may be helpful to have three-to-six months worth of savings tucked away — and if you can swing that, great. But even if that chunk of cash sounds a bit big, it still may be a good idea to have a cushion to help protect you in case of an unpleasant or unexpected surprise. Using your bonus to get an emergency fund started may help you deal with bumps in the road.
3. Start Investing
There are lots of reasons people put off investing. There’s debt to take care of. Not enough cash to spare. If you’re new to investing, it may feel overwhelming. And the payoff may feel so far down the road, you don’t see it. In fact, you may not even be sure you’re on the right road.
If any of those are stopping you, it’s time to clear up some things and understand why this may be a great time for you to start investing.
- Even if you have debt, you can still invest. While paying down your debt may be an important priority, starting to invest now kick-starts a great habit, and you can see your money grow over time. As your debt payments decrease, you may even bump up the amount you invest.
- Feel like you don’t have enough to get started? Guess what — you don’t need a lot. Even if you carve off 10 per cent of your bonus to invest, you’re doing better than if you didn’t carve off anything.
- Investing may be overwhelming for some. But getting started investing doens’t mean you have to become a day-trader. There are simple accounts you can open to start you off — just add money and go.
- Investing may not automatically equal risk. While some investments may be volatile, many offer more security and guarantees.
- Your retirement might be 30 years away, so naturally finding the motivation to invest for that can be tough. But you can invest for shorter-term goals too. A new car. A down payment for a house. A master’s degree. Launching your start-up. Investing may help you reach these goals sooner.
Not sure where to begin? Contributing to an RRSP or a TFSA might be a great place to start, as these accounts offer tax benefits. For example, if you use bonus dollars to contribute to your RRSP, you’ll get some of that money back in a tax return, which can feel like a bonus in itself come April. Your tax return money could then be used to invest more, go on vacation or pay down debt. There are lots of possibilities. If you’re thinking of a shorter-term goal, a TFSA lets you contribute $6,000 a year and your money grows tax-free while in the account.
4. Contribute to an RESP
If you’re starting a family or have little ones at home already, an RESP may be one of the best ways for saving for a child’s education. That’s because the earnings within the account aren’t taxed, and the government matches 20 per cent of the first $2,500 you contribute in a year — which lets your money grow faster, giving your kids a great start when they’re ready to head off to college or university.
Of course, there’s nothing wrong with treating yourself to some fun with bonus dollars you’ve worked hard for all year. But setting some of it aside for your future — whether it’s a short-term objective or long-term vision — may help you achieve the bigger goals you have for life. Your future self will thank you.
Looking for ways to maximize the impact of your annual bonus? Talk to us today.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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