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If you’re in full-time work, you may be one of the lucky employees who doesn’t just get a flat salary. SalaryBut around this time of the year the salary packet gets an extra boost.
Bonus season is coming, so if you want to get your maximum financial impact, now’s the time to get started thinking about how you will use it or spend it,
Naturally there are additional temptations to splurge at this time of year – but thinking of it as a future reward rather than spending money for free can change the impact of the bonus.
1. Bonus Sacrifice
Bonus Sacrifice is perhaps a somewhat strange description. Best How to use your bonus.
There’s no real sacrifice involved – in fact, you really have to put More of your bonus with this approach compared to any other approach, as you won’t pay any income tax or national insurance on it.
However, you will no longer get access to cash. Instead, your employer will send the full bonus amount directly into your workplace pension. There, it will be invested for the rest of your working life and expected to grow significantly when you get access to it (from age 55, rising to age 57 in 2028).
The benefits can be substantial: if you earn £50,000 and get a £5,000 bonus, taking the cash payment will have tax and national insurance cuts that will leave you with less than £3,000.
The bonus sacrifice allows you to keep the entire £5,000, and over twenty years for example, you can expect it to grow to over £13,000 (assuming a 5 per cent annual growth rate).
2. Emergency Fund
Despite the tax benefits, you may not be willing to lock away your bonuses for years or decades. That’s OK – there are plenty of options for a middle ground between doing that and spending it all right now.
For example, you can put your bonus into a high-interest but easy-access account to prepare for unexpected future costs such as car repairs, replacement boilers, or periods of unemployment.
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experts suggest You should have an emergency fund of three to six months’ These events cost money, so if you have less than that, it may be a smart idea to start over or increase your funds.
Along with earning interest on it, it will also help you avoid taking charge loan When unexpected expenses occur.
3. Paying off debt
Speaking of loans, you may decide to use your bonus to pay off part of yours.
According to The Money Charity, the average unsecured debt per adult in the UK is currently around £4,300. The average bonus is less than this, but may allow you to pay off specific debts such as your overdraft or credit card.
A similar option would be to pay more of the mortgage, but before doing so, consider how much interest you will actually save. This is probably less than the interest you could earn by putting the cash in a higher-interest account – or investment This – so consider your options carefully.
Another thing to keep in mind is that it generally makes sense to pay off your highest interest debt first, and your mortgage is probably your lowest interest debt.
4. Investing
There are several ways you can use your bonus as an investment in your future. These include:
- investment In your own right, perhaps by starting a business or acquiring a new skill or qualification that will increase your earning power in the future.
- Investing in your home with upgrades you can enjoy now, and can increase the value of your home when you come to sell it later.
- Traditional investments in financial markets, which generally generate higher returns than cash savings But risks also come with it.
Of course, as with any investment, you have to be comfortable with the fact that you may not necessarily get the returns you were hoping for – and that patience is almost always a requirement.
5. Christmas expenses
It might not be the smartest financial move, but if we’re being realistic, a lot of people will need to get used to it Bonus To cover the increased costs of the holiday season.
If it helps you avoid taking on debt through credit cards, overdrafts and buy-now-pay-later schemes, it may be a wise choice.
However, ideally, try to avoid overspending just because you have the cash available. It’s a good idea to create a budget before you learn about your bonus, then stick to the plan regardless of your extra amount. Perhaps you could set aside a certain portion of your bonus for spending and another portion for one of the above options?
For next year, if you want the option to use your bonus more effectively, you can start a festive sinking fund now. This means you’ll set aside 1/12th of the cash you need Christmas every month, so you’ll have plenty of money ready to spend this time next year – while putting your bonus to work for you in a more productive way.
When investing, your capital is at risk and you may get back less than you invested. Past performance does not guarantee future results.