If 2015 is like last year, many expatriates can hope for some kind of year-end bonus from their employers. A Christmas holiday bonus is an opportunity to reduce debt, add to savings and do the right financial thing.
What NOT To Do
It’s tempting however to do otherwise with your larger than usual money pile. Making a mistake with your year-end bonus is just as easy as doing the right thing; don’t blow it all on Christmas! Also, if you’re eyeing out that gleaming new ride, think again because it’s not advisable for you to spend your bonus on down payment for a new car.
You’re still going to have to manage other payments in the new year. So don’t pay extra on your mortgage unless you could refinance at lower rates. While paying off a mortgage will save future interest, at today’s low mortgage interest rates, such savings are modest and the benefit is further reduced if there’s a tax deduction involved
Also, the economy, governments and jobs have their rise and fall. You shouldn’t count on getting a bonus every year. Many employers pay bonuses when times are good and then cut back or eliminate them if business contracts. If you charge a vacation to your credit card, thinking you’ll pay it off with your bonus, you could be digging a high-interest, cash-depleting hole for yourself in the coming year if your prediction proves wrong.
What To Do
So what should you really do with your bonus? A smart move would be to sink at least some of it into a retirement savings account. Let’s do some calculations here: If a 25 years old expat took $5,000 of their bonus and invested it until he or she turned 65, and earning 8%, they would end up with $108,622.
The younger you are, the better it is to start investing. For instance, if a 35-year-old socked away the same $5,000 bonus until age 65, also earning 8%, the end balance would amount to just $50,313. You would end up with half as much by waiting another ten years to invest!
While getting started on retirement savings is important, because of the compounding effect of interest, consider paying off all or part of any debts that charge steep interest rates as well.If you’re carrying a balance on any credit cards, that’s got to be a high priority. A lot of young employees will also want to look at paying off their student loans earlier, especially those that charge higher interest.
Next, prepare an emergency fund. You need six to nine months of living expenses set aside for emergencies as a rule of thumb. If you have had trouble getting traction on an emergency fund, a year-end bonus can help get you started.
And For The Cherry On The Top…
Last but not least, consider splurging part of your bonus not all on something that may not be necessarily financially smart! Say, a nice vacation, a piece of jewelry you’ve always wanted, or those trendy earphones. How much, you ask? 25% would be a fair amount, depending on the size of your bonus.
Whatever you do or don’t do with your hard earned year-end bonus, remember to treat yourself to a little extravagance. Everyone, when they get a pile of money, deserves to spend it on something they’ve always wanted.
What are you planning to do with your year-end bonus? We hope our resident Finance Expert’s latest tips comes in handy for you at this time of the year. And if you need further advice on taking stock of your finances in 2016, talk to Freddy.