How to Plan and Use Your Bonus?

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Dennis Ng
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How to Plan and Use Your Bonus?

Post by Dennis Ng »

Nov 28, 2010
It's bonus time and time to be jolly....
...but don't spend it all. Now is the time for some financial spring cleaning
By Lorna Tan, Senior Correspondent

The strong economic recovery has left most people looking forward to ending the year with bumper bonuses and annual increments.

Bosses have been urged by the National Trades Union Congress and Singapore National Employers Federation to pay additional bonuses this year compared with last year. This is particularly so for firms performing better this year.

For many people, annual increments and adjustments to restore wages that were cut are also on the cards.

The main reason for the buzz is the economy's robust 17.9 per cent growth from January to June, with full-year expansion tipped at about 15 per cent.

But before you throw caution to the wind and splurge on lavish Christmas gifts and expensive holidays, there are some issues to think about.

After all, with the holiday season around the corner, December is an opportune time to do some financial spring cleaning to set your house in order.

1 To spend or not to spend

Review your financial situation first. Customer needs and priorities change depending on their life stage, said Mr Marcus Teo, senior vice-president and head of Offshore Banking Centre, HSBC Singapore.

The review should include assessing your credit and savings situation, protection coverage, job security and near- and longer-term financial goals and commitments.

There is no harm in enjoying the fruit of your labour and rewarding yourself and your family but that does not mean you should blow your entire bonus.

Mr Dennis Ng, founder of financial portal, suggests saving at least 30 per cent of your year-end bonus.

But 'of course, the best thing is to treat bonus as just that, a bonus, that is, the entire bonus should be saved', he said.

So what makes a good or bad expense?

According to Mr Ng, a good one involves a chance of recouping or making more than what you have spent. It could also lead to you improving intellectually, mentally or physically.

Examples include buying self-improvement books, attending personal development courses and family vacations since this will improve your personal relationship with your loved ones.

But a bad expense means there is no chance of recouping or making more than what you have spent. It could mean something like gambling that will bring no improvement to your life.

To rein in your Christmas shopping, Mr Brian Tan, vice-president at ipac financial planning Singapore, advises that you devise a bud-get.

And if you are worried about a 'financial hangover' after Christmas, use cash or a debit card for purchases, he said.

2 Paying off credit card debts

If you have built up a sizeable balance on your plastic, use your bonus to pay it off before the new year, said Mr Ben Fok, chief executive of Grandtag Financial Consultancy.

3 Hedge against inflation

Once you have set aside some emergency cash, the amount saved from your bonus can be invested.

This is better than putting all your cash in the bank and the paltry rate of around 1 per cent they are paying for fixed deposits.

In fact, inflation is expected to continue to be high next year, given increased transport, housing and raw material prices, said Mr V. Arivazhagan, managing director of regional investment and treasury products at DBS Bank's consumer banking group.

In the first nine months of this year, inflation averaged 2.4 per cent compared with 1.6 per cent in the last 10 years to September.

4 Review your investment portfolio

To those planning to invest their year-end bonus, Mr Arivazhagan has this piece of advice: integrate the additional cash with the existing portfolio.

This beats just investing it in the next best investment option or flavour of the month product.

The bonus can be added to the portfolio either as a lump sum or as part of a regular savings plan.

The portfolio should still comprise an asset allocation that is aligned with your risk profile.

An investor with a conservative risk profile, for example, should allocate 30 per cent to equities while bonds and cash take up 70 per cent.

You should also rebalance your portfolio so that you are not overly exposed to an asset class that has been driven up in the past months due to the market rally.

Mr Fok recommends that investors reassess their attitude and capacity towards investment risk as it changes over time.

DBS is confident that Asian equities will perform well over the medium term, given the likelihood of strong liquidity inflows into Asia on the back of the US Federal Reserve's announcement of the second phase of 'quantitative easing'.

5 Building your stocks war chest

The festive season is typically a lull period for the stock market. DBS Vickers strategist Yeo Kee Yan looked at trading activity during the November to January period over the past decade and found that December was the quietest month 90 per cent of the time.

The good news is that interest picks up markedly in January.

Mr Yeo said: 'We are expecting a seasonal decline in market activity after the results season ended from mid-November, before reviving just before the turn of the year.'

He advises investors to 'accumulate stocks over Christmas in anticipation of the pre-Lunar New Year rally' with the best time during or just before the Christmas holidays. Next year's Chinese New Year starts on Feb 2.

Mr Yeo recommends three things to focus on during the December lull.

Firstly, rig builders Keppel Corp and Sembcorp Marine stand to win new orders next year.

It could be a record year for SembMarine if it clinches Brazilian oil company Petrobras' contract for seven drill ships, with a projected total order win of $11.4 billion.

Likewise, Keppel Corp stands to win total new orders of $11 billion, including $6.5 billion from Petrobras, next year.

Secondly, crude palm oil stocks like Indofood Agri and First Resources should benefit from firm prices early next year, mostly due to higher soy oil prices.

Soy oil is a direct substitute for palm oil, so rising soy prices tend to lift palm oil values. Soy oil prices are expected to keep rising due to continued weakness in the US dollar and the expected La Nina weather phenomenon in South America. This may cause delays in soybean planting and reduce harvests in February to May next year.

Lastly, do not forget small caps. The post-Christmas to pre-Chinese New Year rally tends to stimulate retail participation in the market and investors often focus on small caps.

DBS Vickers favours capital goods and basic materials plays like Ezion, PEC and Midas.

Mr Yeo also sees construction stocks Yongnam and OKP benefiting from the accelerated building of new HDB blocks, and major transport and other infrastructure projects.

6 Review your housing loan

If you are paying more than 2 per cent per annum (pa) on your mortgage, talk to your housing loan officer or a mortgage broker to see if it makes sense to refinance. With the three-month Singapore Interbank Offer Rate at about 0.4 per cent, most housing loans have interest rates as low as 1 per cent pa.

If you are planning to pay down your mortgage with your bonus, Mr Teo suggests that you weigh the benefits of reducing your household debt against the need for sufficient cash flow, especially to take advantage of investment opportunities.

This is because while it is always sensible to reduce one's borrowings, today's interest rates are at multi- year lows, he added.

7 CPF top-ups

The year-end period is the time when you can consider the number of government schemes to help save on personal taxes. For instance, you can claim relief if you make cash top-ups to your CPF Retirement or Special Account under the CPF Minimum Sum Topping-Up Scheme.

Additional relief will also be given for cash top-ups by you to the Retirement or Special Accounts of your spouse, siblings, parents or grandparents. By doing so, you can claim up to $14,000 in relief, said Mr Tan.

You must make the top-up before the end of the year to be eligible for relief this year. To check on your tax savings, use the basic tax calculator at

8 Supplementary Retirement Scheme (SRS)

If you plan to make a contribution to SRS, do so before Dec 31. The maximum SRS contribution for a Singaporean/Singapore permanent resident and foreigner is $11,475 and $26,775, respectively. You do not need to make a claim in your tax return as it will be allowed automatically based on information provided by your SRS operator.

9 Sign up for CPF Life

If you were born before 1955 and wish to sign up for the national annuity scheme CPF Life, do so before Dec 31 to enjoy a Life bonus of up to $4,000. Use the CPF Life Payout Estimator on the CPF website to find out which plan suits you best and the amount of Life Bonus you stand to enjoy.

10 Use up your corporate employee benefits

If you are an employee, use up your corporate flexible benefits which come with your job. Most entitlements reset at the beginning of each calendar year, noted Mr Tan.

Make appointments for your annual health or dental check-ups and buy medical supplies that are covered in your entitlements before the end of the year.

11 Travel safe

If you are travelling over the holidays, get travel insurance.

12 If you are self-employed...

a) Deferring income and accelerating deductions

As a self-employed individual, there are some income items and expenses you can control to minimise income tax liability, said Mr Tan.

Unless you have a good reason to believe that next year will bring you a higher total income and move you into a higher income tax bracket, you may want to defer income until after Jan 1. For example, send invoices out late next month so you will most likely receive payment in January.

This is also the time to buy all of the deductible business equipment and supplies you have yet to purchase but will need soon. Doing so will maximise your business expenses this year. You may also get better deals in year-end holiday sales. Make the purchases before Dec 31 and save the receipts.

b) Voluntary CPF contributions

You may make voluntary contributions up to the prevailing CPF annual limit and enjoy tax relief for these if you are self-employed. This year's limit is $26,775.

The CPF Board must receive the voluntary contributions by Dec 31 in order for this year's CPF Annual Limit to be applied to your contributions.

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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