Q: I just received my 13th month pay and cash bonus from my company last week. I have been thinking where to keep it as I am afraid I may be tempted to spend it during the holiday season. Can you advise me how to spend my bonus wisely? – Krizzha, by email
A: Some people feel like they won a cash prize from a raffle when they receive their Christmas bonus. Because it is a financial windfall that you don’t regularly receive as part of your monthly income, there is a strong tendency to spend it impulsively, especially during a gift-giving holiday like the Christmas season.
Realizing the need to save your extra cash doesn’t mean that you can’t spend money for your family. You can budget a portion of the cash to celebrate the holidays but invest a bulk of it wisely to make sure that the money will grow and last for a long-time.
When you invest your savings, your ultimate goal is to build wealth that will take care of your needs in the future. Earning an unexpected financial rewards is a great opportunity to plan and put your personal finance in order. Here are the five ways you can maximize your cash gifts and bonus this Christmas:
1. Invest by paying off your debt
If you have credit card debts that you habve been paying for some time now, this is the best time to reduce or pay it completely. Imagine the interest expense that you will save by paying your debt. If you are paying 3.25% interest rate per month on your credit card balances, this is the amount of investment returns that you will earn by paying off your debts.
When you decide to pay off your debts, make sure that you separate your good debt from the bad debt. The debts that you need to prioritize to pay off are those that you purchased for consumption. For example, credit card expenses you incurred for entertainment, groceries, eating out with friends or travel. Using debt to acquire things that do not increase in value are called bad debts.
2. Invest for capital appreciation
One way to grow your savings is by investing in assets that will rise in value over time. Stocks, mutual funds or real estate are some of the assets that you can buy for capital appreciation. You can keep your money in these assets not for short-term, speculative appreciation but for long-term investment.
Investing in assets for capital growth is also a good way to hedge your savings against inflation. For example, if the dollar-peso exchange rate goes beyond Php50 to a dollar, prices in general may also go up due to higher costs. When this happens, listed companies at stock exchange also have to increase selling prices, which increase income. Higher income drives higher stock prices.
3. Invest for cash flow income
Another way to grow your savings is by investing in assets that pay regular cash flows. Instead of keeping your money in a regular savings account that pay you less than 1% a year, you can invest in reputable companies that pay high dividend yields or interest rates.
For example, you can invest in dividend paying stocks or bonds that can pay 6% or more per year. Of course, every return always comes with risk. Make sure that you choose the right investment that aligns with the risk that you are willing to take.
4. Invest for peace of mind
The purpose of creating an emergency fund is to provide a safety fund that can be used for personal financial crises such as hospitalization, car accidents or any major event that requires sudden cash outflow.
Ideally, an emergency fund must be at least six months of your monthly living expenses. If you have not saved enough yet, you can start to build at least three months’ worth of expenses first. You can keep this in a separate bank account so that you will not be tempted to use it for your regular expenses.
If the amount of emergency fund is substantial, you can invest a portion of it temporarily in short-term, interest-bearing money market funds that you can liquidate immediately when you need it. In this way, you don’t waste the opportunity to earn extra interest income while your money is parked for emergency purposes.
5. Invest in yourself and others
There is no better investment than investing in your personal growth. Treat yourself this Christmas by buying books to learn new skills and improve your financial literacy. Every knowledge that you will learn by studying will become part of your life skills and give you returns that will multiply in the future.
Christmas is also the best time of the year to appreciate all the people that have been part of your success. Invest in relationships by showing your gratitude. You don’t have to give expensive gifts but a simple token of appreciation that you did not forget them during this holiday season should be sufficient. If you have run out of budget, you can also show your appreciation by investing your time by greeting them with a personal message for the holidays.
Henry Ong, CMC, is president of Business Sense Financial Advisors. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter @henryong888