How should I use my big bonus wisely?

In this latest iteration of our Work and Wealth Watch series, where money coach Luca Caruana gives his expert responses to all your questions related to money, work and wealth, we explore the psychology behind a healthy approach to personal finances.

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Dear Luca,

I am lucky enough to have a nice bonus coming at the end of this year from my day job, but I have no idea what to do with it. It is more than any single paycheck I have ever gotten and I am very split between using some of the winnings to pay off remaining debt, invest for the future or make a large purchase like a new car or take my family on its first vacation.

The bonus is for around €30K and it seems like a great way of pulling ahead, but don’t want to make a choice I’ll regret further down the road. I am currently in a fairly good financial position and have a healthy emergency fund, no high interest debts and have been contributing modestly to my pension. Lucky for me though, I do still have a few small loans that I could knock out with this bonus and free even more monthly cash flow.

I am extremely tempted to chase higher returns on investments or treat my family with a once in a lifetime experience.

What do you think? I appreciate your thoughts.

Grateful but Conflicted

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Luca’s Response:

Dear Grateful but Conflicted,

Receiving a financial windfall is always great, but as you pointed out in the end it’s important to put it to work properly. I can share with you some tips how with some meticulous planning you can change a one-time bonus into an asset for your financial wellbeing.

Because you’ve established an emergency fund and do not have high-interest debt, a bonus can enable some very powerful options.

This is how I would break it down:

Debt Repayment:

Paying some of the smaller loans can be a good strategy if it lessens the pressure. However, if these loans are not impacting your immediate financial security, you might pay more attention to other parts that could have the potential for growth.

Investing for the Future:

If you are already in for your pension, and if you are comfortable with your long-term retirement plans then this bonus may be a chance to invest another way! Or you may just want to diversify your portfolio or explore alternatives that are not as sensitive to changes in your risk tolerance and time investment. Investing is a beautiful thing because it allows your money to work for you, €30,000 could really set you up financially going forward with the potential of compound interest.

Enjoying the Present:

As much as you want to reinvest every dime, it is also just as important relaxation and reward for all of your hard work. A family event (be it a vacation or some other significant thing you buy) can bring smiles permanently and feed into your happy experience. But, I suggest to keep it restricted so that it does not allow you to free fall into your indulgences. One rule of thumb is to designate just a maximum of 10-20% of your bonus into a splurge so that you can enjoy it without any guilt and the rest can keep on working toward to your future.

Therefore in a nutshell:

I suggest you get your bonus in three parts as well:

1. 40% toward investments to grow your wealth long-term.
2. 30% toward debt repayment to free up future cash flow and give you peace of mind.
3. 20-30% toward something enjoyable for you and your family, so you can create memories that will last far longer than any temporary purchase.

This balanced approach allows you to take care of your financial future while also enjoying the present. By doing so, you’ll make the most of your bonus without feeling like you missed an opportunity, whether it’s financial or personal.

I hope this helps.

Luca

The Money Coach, from the Money Coaching Hub

CEO & Founder of Monipal

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