What should you do with your salary increase or bonus? Get on the fast track towards achieving financial freedom! The original version of this article was published at TonyRobbins.com.
It’s a good “problem” to have, but if you are in the position of having received your bonus or you are expecting a salary increment, you may be wondering what you should do with the extra cash. If you find yourself already a month or two into the year and wondering where the extra money went, keep this information in mind for the next time you’re blessed with a financial windfall.
First things first: If you don’t have an emergency fund, this is your top priority.
Yes, before investments, and even before paying down debt!
A shocking 1/3rd of Malaysians do not even have RM500 saved for an emergency!
If you have anything less than three months worth of living expenses, this is where your bonus NEEDS to go. If anything were to happen, say a medical or family emergency, this cushion could save you from financial ruin.
Okay, if you’ve your three to six month emergency funds saved, consider these options and determine what is best for you right now.
Option 1: Invest in Your Freedom Fund
Let’s face it, words like ‘budget’ and ‘savings account’ aren’t very sexy and don’t usually evoke a passion to allocate our funds accordingly. However, it’s easier to save when you know you are saving with a purpose – to buy your freedom (now, and in the future) from worry and lifetime slavery paying endless bills.
Choosing this option allows you to reach your short-term goals faster. Maybe your goal is to become debt-free this year – now that’s a sense of freedom! Or perhaps the focus of your Freedom Fund is absolute financial freedom, having built the money machine necessary to passively finance your life whether you choose to continue to work or not.
Whatever your goal is, pull that bonus out of your salary receiving account immediately and put it into your savings until you decide how to allocate it, so that you don’t wake up one morning to find that it’s all gone and you received no enjoyment from it.
A good guide is to save and invest 20% of your net income (after EPF deductions). If you’re doing so, you are effectively saving 40% (including your EPF deductions) or more of your income making you an excellent saver! Live on 60% or less of your income and see you money grow with the real-life magical effects of compounding.
Option 2: Increase Your PYF (Pay Yourself First Percentage)
Option 2 focuses on rewarding yourself financially in the future. This strategy is particularly effective for a raise, but works for a bonus too. Save a fixed percentage each pay period (or a fixed percentage of your bonus) and then invest it intelligently. Over time, you’ll start living a life where your money works for you instead of you working for your money.
A salary increment is the perfect time to implement the Save More Tomorrow strategy, brain child of Nobel Prize winner Richard Thaler and behavioral economics professor Shlomo Benartzi. Simply put, this technique is to automatically divert 3% of your salary into a retirement account. Because you never received the money, you don’t feel like you’ve lost anything and within a couple of raises you’ll be investing at least the recommended 10% toward your future financial freedom.
Pay yourself first before you pay anyone else! Money has the slippery habit of slipping out of your hands very quickly.
“Saving must become a priority, not just a thought. Pay yourself first!”
Option 3: Allocate Your Bonus Among Your “Buckets”
By dividing your bonus evenly among your Security Bucket, your Risk/Growth bucket, and your Dream bucket, you are simultaneously investing in your future and creating a jackpot that you can enjoy today. This will stimulate and excite you in ways that will likely cause you to want to earn more, save more and invest even more effectively – because of the rewards today, not just some day in the future. (If you haven’t yet explored the bucket strategy, click the link above.)
- Security Bucket: insurance policies, cash, fixed deposits, low-risk bonds, your home, pension schemes, etc
- Risk/Growth Bucket: equities, shares, investment property, commodities, unit trusts, etc
- Dream Bucket: fun money, travel fund, bad mood fund, etc
Have a bit of fun with your bonus or unexpected windfall (don’t be a scrooge!) but at the same time set aside funds to save and invest for your future!
Finally, whatever option you choose, consider giving a percentage to your favorite worthy charities or causes. Not only will you feel great, but also someone else will benefit from your bonus, multiplying the financial blessing. The more you give, the more you receive.
“The secret to living is giving.”