Heading into the final months of the year, many Singaporeans may already be booking their year-end holidays, buying cool new gadgets or gifts to reward themselves or spending it on Christmas presents. Most of this is usually done against the bonuses that we think we will be receiving.
How Much Will Singaporeans Be Receiving In Bonus?
While 2017 has not been a stand-out year by any measure, there have been indications that economic activity and business sentiments are picking up. This points to employees potentially receiving a similar amount to 2016.
According to a survey by JobStreet.com, the average guaranteed bonus workers received by Singapore employees in 2016 was 1.45 months. This is an average figure, and the same survey stated that 30% of workers did not receive any bonus in 2016.
Using the median income in Singapore, of $4,056, an average worker stands to take home close to $4,022 (after deducting CPF contributions) for his/her bonus this year-end. Your CPF contributions, of close to $1,860, will of course not be part of your disposable income.
So, what should you being doing with your bonus?
Pay Down Heavy Debts
No matter how tempting, the very first thing you should do is pay down any debt that requires you to fork out more than 5% in interest payments. This typically encompasses any unsecured debt such as renovation loans, personal loans, credit card debt or other such liabilities.
Another way to think about this is that you’ll be saving on hefty interest charges that will be eating away at your wealth. By eliminating such expenses, you will be able to start building a portfolio that will start accumulating wealth for your future, and even better, you’ll have less stress dealing with less debt.
Splurging Your Bonus On The “Finer Things In Life”?
The short answer is no.
The long answer is, of course, more complicated. We all know that “living life” is part of…well…living life. However, your bonus should not be viewed as a bonus that’s dropped out of the sky. You’ve worked hard all year and your bonus is actually part of the pay that you deserve to be earning. In other words, no boss is going to pay employees a salary that they don’t deserve.
Instead, what you should be doing is to allocate a portion of your take-home pay to “life live”.
Invest – And Make Your Bonus Last A Lifetime
Investing your bonus is one of the wisest things you can do. By investing the $4,022 in your hands today, you will immediately be receiving $201 a year, every year, for the rest of your life. We derive this number by estimating that the $4,022 will be invested in a relatively safe financial instrument and earn you close to 5% returns per annum over the long term.
One way to achieve this is in broad-based and relatively safe investments such as the Straits Times Index (STI) exchange traded fund (ETF), made up of the top 30 stocks listed in Singapore. Since 2002, it has returned 11.2% per annum.
Of course, this number is not fixed – in the last one year, it has returned 15.4%, while in the last five years, it has returned only 4.0%. The idea is to invest over the long term and receive an average return.
By subsequently investing your bonus each year, and the returns from past bonuses that you’ve already invested, you may be able to accumulate a tidy sum of over $150,000 in the next 20 years, if you manage to receive a 5% per annum return over the long-term.
Of course, you could, and should, allocate a portion of your take-home pay to investing as well to accumulate your wealth over the years.
Save On Taxes At The Same Time
You could also choose to channel any bonuses to your CPF Special Account (SA) each year and watch your money grow at a risk-free rate of 4.0%. This way, you’ll also save on taxes as bonuses are treated the same as income in Singapore.
Doing this over the long term will beef your CPF balances and ensure you have a sizeable amount by the time you retire and/or need to withdraw the money. At this stage, you’ll tap into CPF LIFE.
Another account you can tap on is the Supplementary Retirement Scheme (SRS). By depositing your bonuses into your SRS account, you can similarly save on taxes. However, your cash balance in the account will not earn any substantial returns and you need to invest it.