Five ways to invest a bonus

When anticipating an annual bonus, it is natural to envision all the things you want to purchase or start planning a lavish vacation.

However, it is worth taking the time to step back and contemplate how you intend to use such a windfall before it lands in your bank account.

Consider how your bonus can best serve you and your objectives in both the short and long term, regardless of the amount you earned.

Here are five strategies to leverage your bonus to stretch its advantages well into the future.

1. Save for an emergency fund

It is imperative, as a minimum, to keep three to six months’ worth of expenses as an emergency fund.

This provides peace of mind and a contingency for anything unexpected that may come your way throughout the year. For example, job loss or a medical emergency.

An emergency fund should be kept in a deposit account that is easily accessible.

If you don’t already have three to six months’ worth of expenses in cash, use your bonus to build it up.

However, beware of having too much cash. 

Inflation is high and deposit interest rates are still ultra-low, meaning that cash on deposit is losing value in real terms.

Once you have sufficient emergency funds, allocate any remaining bonus to one of the options below.

2. Pay down debt

The prospect of increasing interest rates as central banks seek to tackle inflation makes paying down debts worth considering.

Especially if that debt is high-interest debt.

For example, credit card debt is often subject to interest rates of 20 per cent or more.

There is no sense in investing your bonus in the hope of outpacing that 20 per cent. It won’t happen. 

Use it to get the debt paid off and then try not to fall into the same trap again.

3. Save towards retirement 

As expats, we don’t always have a formal pension structure to pay into.

If you do, then using it to save both a portion of your monthly income, as well as topping it up with bonus money would be worthwhile.

Especially if your employer offers you an incentive to do so.

Even if you do not have a formal pension structure available, investing a proportion of your bonus towards retirement makes sense if you want to retire early or maintain a certain level of comfort when you stop work.

4. Save for children’s education

In the UK, the average student graduates with £45,000 of debt and, under new proposals, could end up repaying these debts over their whole working career.

To help your children avoid this burden, or to decrease the financial burden on your finances when supporting them, you could create a fund to cover further education costs and use money from your bonus to seed it.

5. Take a balanced approach to investing your bonus

Investing, using a low-cost, well-diversified strategy, is one of the best ways to grow your bonus.

However, before doing so, it is important that you get an idea of what you really want to achieve with the money and know the timeline that you are working with, i.e. is this investment driven by a short or long-term aim?

It is also important to understand your risk preferences before choosing where to invest your bonus.

A high-risk investment approach may lead to better returns but it is also more likely to see wider swings in value. 

These swings usually work themselves out over time, so this approach is better suited to those with a long-term investment horizon. 

If your goal is short-term, it would be prudent to stick with a more conservative investment approach, where your money is less likely to be subject to market fluctuations.

Every week, I send out a short email to British expats who are approaching or considering retirement.

I use it to answer common (and not-so-common) questions that they have about pensions and investments.

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About Ross

▪️Ross has been a financial adviser for the past 26 years.

▪️He specialises in working with British expats over age 50 who are looking to optimise their finances for retirement.

▪️He is qualified as a financial adviser both in the UK, as a Chartered Financial Planner®, and in the EU, as a European Financial Planner®.

▪️Ross has been an expat himself for 22 years and is married with 2 children.