Entrepreneurs – it’s been a great year. Employees - you just got a bonus – should you spend or save?

There were a couple of rather crazy events taking place in 2017 to celebrate Canada’s special birthday of 150 years for our country.  Throughout July and August, Canadians could have a seat on a red couch that travelled across the country to collect their stories about what Canada means to them. 

In Ontario, the government brought a giant rubber duck (19 metres high) to Toronto for the July long weekend.  Visitors to the waterfront festival were invited to take selfies in front of the duck. This rubber duckie also travelled to Midland, Owen Sound, Brockville, Amherstburg and Sault Ste. Marie.

Getting a bonus from work is also cause for celebration.  While entrepreneurs aren’t in the same category as employees, an exceptionally good year financially often puts an extra wad of currency into their wallets too!  When advising clients, I often get asked about what they should do with annual bonus and/or a surprise extra lump sum. 

Whenever you have that kind of great year in business or get a bonus from your employer, it’s important to have a plan of what to do with this windfall so that you have some reward for your hard work, yet also contribute to your long-term financial goals.  Experts recommend spending up to 50% on “fun” or something nice for yourself, and allocating the remaining 50% to your longer term plans. 

I doubt anyone needs suggestions for the fun spending.  However, some suggestions for the serious half of the payout are:

  1. Top up your RRSP contribution*, which can result in more money in the pocket as it means you are reducing income tax either in the form of a refund or paying less next April 30. Employees – your company will probably deduct the tax up front.  Entrepreneurs - remember that you will owe tax on the bonus itself so put some cash aside in preparation.☹.
  2. Make a contribution to your TFSA*.The growth in this investment is special in that it will never be taxable, even in retirement (unlike eventual compulsory withdrawals from the RRSP converted to RRIF).
  3. Put an extra payment on your mortgage to reduce the total interest paid on what is likely your biggest debt.
  4. Pay down other debt – especially debts such as your credit cards which incur very high interest and reduce your ability to spend elsewhere.Getting your total credit exposure down to 35% or below increases your credit score and makes credit more accessible and less expensive.
  5. Start to build up emergency savings of three to six months’ salary for any unexpected disruption to your income.If you already have partial savings, contribute more.

* Before contributing to either RRSP or TFSA, be sure to check what contribution room you have available as there are penalties for over-contribution.

Implementing any of these suggestions strengthens control over your cash flow empowering you to fund financial goals and dreams that have meaning to you and your family.  Life these days goes so fast that we sometimes forget to stop and think about what we really want and how to get it.

A tax refund is also extra cash, much like when your employer puts some extra money into your pocket.  Just remember, it is different in the sense that the tax paid was your money in the first place and it isn’t “found money” in the same way as a bonus.  Now that you have it back, use it prudently.  You can employ the tax refund for the same suggestions as the bonus; however, you might also consider:

Some questions to reflect on:

1. Imagine you or your employer has paid you a bonus of $10,000.

How would you divide it between these categories?

•             Fun/rewards for self                      ______%

•             Savings/Investments                     ______%

•             Debt reduction                              ______%

2. Rank the following savings or investment plans in order of importance for yourself.

•             RRSP                                       _____

•             TFSA                                        _____

•             RESP                                        _____

•             Emergency Savings                  _____

3. Rank the following debt repayments in order of importance for yourself.

•             Mortgage                            _____

•             Credit cards                        _____

•             Line of credit                       _____

•             Car loan                              _____

4. Red couch or rubber duck, which was the craziest?

Marylou Heenan CCS is a Financial Advisor with Assante Capital Management Ltd.