Liam has five more ways to put your end-of-year bonus to constructive use
I RECENTLY gave you four suggestions on what you could do with your end-of-year bonus, and, as promised, I’m following up with five more this week.
1. Boost your emergency fund
Ideally you want to have six months of your monthly income in reserve in the event of something unforeseen happening. Accumulating that amount can be a big ask if you are trying to save a certain amount towards it each month. A lump sum is a great way to kickstart or accelerate the amount you need to hold in the event of the unexpected. So, if you don’t have that emergency fund locked in just yet, consider bumping up your fund from some of your bonus.
2. Accelerate mortgage repayment
When you make a lump sum lodgement against the repayment of your mortgage, you have two options; you can either reduce your monthly repayment or reduce the term. If you don’t need to improve your monthly cash flow by reducing the monthly repayment, then choose reducing the term – this way you will pay less in interest.
But before you do anything, find out what the impact is first, and once you know what this is (get it in writing from your lender) you can then choose which option suits you best.
Making a lodgement against your mortgage, particularly if you have a fixed or variable rate is a great investment. If your mortgage rate is 3.5%, to get the same return for money on deposit, you would need to be earning a gross rate of 5.38% and can you get this rate at the moment? No.
The only way you could hope to get that return is investing in unguaranteed accounts or investing in vehicles that carry a high risk. Why would you do this, when you are getting a guaranteed return of 3.50% by making a lump sum lodgement against your mortgage.
3. Invest for long term growth
There is very little to be earned for money on deposit right now, with rates < 0.5% and when you factor in DIRT tax and inflation, it’s likely your real return will be negative. This ultra-low interest rate environment is set to continue for the foreseeable future.
For example, if you put €20,000 into an account earning 0.25%, your real return will be -0.5375% so your money will reduce in value by €108 over 12 months.
Admittedly, not a life-changing amount to lose, but when you factor in the opportunity lost by not investing in accounts returning 3% per year (the interest earned would amount to €600 in one year on a balance of €20,000) means you are leaving behind about €3,504 over just five years.
There are many accounts available that offer capital guarantees, which are likely to return 3% to 4% per year. You just need to seek them out, because they do exist. If you can’t or don’t want to, get a financial adviser to do it for you.
4. Investment in yourself
A bit of a cliché I know but investing in yourself is something you should consider. I wrote an article three weeks ago about how to become financially independent, and in it, I refer to how important investing in yourself is, if you want to generate real wealth, which will allow you to retire earlier.
Using some of your bonus to invest in further education, books, attending conferences etc. is making good use of it and investing in your health like joining a gym or enrolling in exercise classes, or learning something new.
5. Make a difference
Giving some of your bonus to those less fortunate can be very rewarding and there are a number of terrific charities who would welcome a donation from you, particularly at this time of year.
They can increase your donation to them by claiming tax relief on the amount you give them, provided it’s greater than €250 over the course of a year, and Revenue has approved them as being tax exempt because of their charitable status.
The tax relief allowed is calculated with reference to the gross amount an individual would have to earn, in order to net down to the contribution they make. The tax rate currently being applied to contributions is 31%.
So, if for example, from your bonus you gave a charity €300, the tax relief available is €134.78, meaning you’re turning your €300 contribution into a €434.78 one.
You don’t have to pick just one of these suggestion, you can mix and match to fit your situation. I never want to take the fun out of any bonus, but it can vanish quickly and getting it to work for you will have a much longer-term impact than any diamond necklace, first class airplane tickets or a 55-inch curved TV screen will ever bring you.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie