This article is written in collaboration with dollarDEX. All views expressed are the independent opinion of DollarsAndSense.sg
Rejoice, it’s bonus season again! As employees, we hope for our company to do well in the financial year, and be rewarded for our year-long efforts in the form of a bonus.
Randstad Singapore’s Bonus Expectations 2019 survey showed that 83% of employees in Singapore expect a bonus this 2019. Thankfully, employers share the same view, with 82% of companies planning for a bonus payout in 2019 to recognise and reward their employees.
Here are 4 different ways that companies typically pay out bonuses.
#1 Annual Wage Supplement (AWS)
Many companies provide employees with an Annual Wage Supplement (AWS), also known as 13th month bonus. This is a one-month bonus on top of an employee’s total annual wage.
The AWS is not compulsory and can depend on the employment contract. In situations where the company’s business results are poor for the year, it is possible for an employer to negotiate for a lower AWS pay out.
#2 Annual Variable Bonus
Typically, employees in the Civil Service can receive bonuses in the form of an Annual Variable Component (AVC), on top of the AWS. The AVC and AWS make up a civil servant’s full year-end bonus.
In 2018, civil servants were provided with an AVC of one-month’s pay, while lower-wage civil servants were compensated with a minimum year-end AVC of $1,800.
For employees who are not civil servants, the AVC is usually an extension of the AWS, where, depending on the company’s performance, employers can choose to pay out several months’ worth of wages in bonuses.
#3 Performance Bonus
A performance bonus is usually paid out based on an employee’s individual performance in the year, rather than the company’s aggregate performance. This is often a reward for over-achieving predetermined goals and hitting certain set targets. Very often, a performance bonus is given after a performance appraisal where an employee’s performance for the year is evaluated. Performance bonuses can also be given to specific teams and departments for their exemplary performance.
It serves as a reward for an employee’s outstanding performance for the year, as well as encouragement to continue their good work and recognition of their value to the company. However, a performance bonus is also not compulsory.
#4 Stock Options
Instead of paying out bonuses in cash, some companies may choose to reward their employees in the form of share options. These shares often come free or as options offered below market value.
Giving employees stock options is one way to get employees’ skin in the game. This is so that the employee is personally vested in the performance of the company – gaining considerably more when the company does well and not as much if the company doesn’t.
Employers also benefit from giving employees stock options. When employees have a greater sense of ownership in how external parties perceive the company, the quality of work at the company and, ultimately, how well the company performs, employers can expect more employees that strive to overachieve. This also helps companies retain and reward their best employees that have been with the company for years or have contributed significantly to the growth of the company.
What Can You Do With Your Bonus?
The first thing we need to note is that our bonuses, in all the above forms, are taxable. One significant implication is that we may be paid a considerable amount in bonuses at the end of the year, and not have sufficient time to put in place any tax-reducing plans, such as contributing to our CPF or Supplementary Retirement Scheme (SRS) accounts.
We can reduce the taxes we pay by topping up our CPF accounts or the CPF accounts of our loved ones. CPF members can make CPF contributions of up to $14,000 every year, which are eligible for dollar-for-dollar tax relief – $7,000 for ourselves and $7,000 for another family member.
Once we get our bonus, there are three main things we can do. We can either spend it, save it or invest it.
Option 1: Spend It
Many people tend to view their bonus as a separate “bonus” rather than part of their salary. With this mindset, it becomes much easier to spend a large chunk of our bonus rather than do something prudent with it.
If we have decided on spending it, there is an inexhaustive list of things that we could want. It could be something we’ve been eyeing for a long time, like a Nintendo Switch, Rolex Watch, Prada Bag or Burberry wallet.
We can also choose to spend on a lifestyle that we feel we deserve. This can include experiential things such as fancy restaurant meal or an annual vacation to Maldives with your partner. Another way we could spend our bonus, depending on how much it is, is to use it as part of the downpayment for a car.
A prudent way to spend your bonus would be using it to pay off high-interest debts such as your credit card bills. You can also use your bonus to pay off your insurance premium, annual subscription fees and loans.
Option 2: Save It
You can use your bonus to build and top up your emergency funds if they have been depleted.
Our emergency funds form a crucial component of prudent financial planning. It will help tide us through difficult and unexpected situations such as finding ourselves out of a job or if we have a medical emergency in our family. A good benchmark is to have enough in your emergency funds to support you and your family through at least six to nine months of unemployment.
We can also save our bonus for future big-ticket purchases. For young couples that are looking to get married or buy their own home, saving up towards these big-ticket expenses from an early age will ease financial pressure in the future. It will also allow us to fully focus on the preparation and planning, rather than having to worry about the finances at that point in time.
Option 3: Invest It
We can also use the money to invest in ourselves. In today’s day and age, work has become more dynamic and the skills we are taught in school are often outdated by the time we enter the workforce.
As a savvy Singaporean looking to increase your value and employability, we can enroll to learn a new language, pick up coding and programming knowledge or learn how to use applications such as Photoshop. This will offer our current, and future employers more value and relevant skillsets compared to someone else with similar qualifications.
Another financially savvy way to use our bonus is to make it work and deliver a return for us – in other words, invest it. This allows us to grow our retirement nest egg and live more comfortably in the future.
Start Your Investment Journey Early
By investing from a young age, we are able to tap on the power of compounding, to multiply our returns over a long-time horizon. We can start investing on our own, if we have the time and interest to learn, or through a platform, with tools that can help us to start making investment decisions.
One investment platform that allows investors to start their investment journey is dollarDEX. dollarDEX is an online investment platform by Aviva that makes investing in unit trusts easy and affordable for everyone.
Investing in a unit trust allows us to instantly gain exposure to a diversified portfolio without having to spend time selecting the best stocks to be included in the fund. The effort to research, select and monitor the stocks to be included in the portfolio is outsourced to a professional fund manager. For the benefit of having financial professionals manage our investments, an annual management fee will be factored into the daily pricing of the unit trusts.
Fees are one of the key considerations we have to keep in mind when investing. High fees inevitably eat into our investment returns over the long term. Unlike many investment platforms, dollarDEX charges no additional fees to consumers. This means every hard earned cent you invest, goes fully into your investment portfolio.
Choosing to spend, save or invest your bonus depends on your financial goals and aspirations. A mix of the three options would allow you to not only reward yourself with a purchase, but also save up for rainy days and invest for your future. For those that are looking to invest your bonus, dollarDEX is one way for you to get started on your investment journey. Find out more about how you can start investing with dollarDEX here.
dollarDEX is holding an investment seminar for beginners 20 June 2019, even for those that have already started investing. Get your tickets to the seminar to learn more about the basics of investing, why you should start investing, and how to meet your savings goals with regular investments, even if you’re completely new to it. You will also get financial planning tips to help you meet your protection, wealth accumulation and wealth preservation needs. More details here.
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