It has been a difficult year financially worldwide, with political and economic uncertainty dominating global news headlines. In this context, not every company will be able to pay out annual bonuses. If you are lucky enough to get a bonus or a 13th cheque, should you spend it or save it?
We all have long-term goals and dreams, but in the short term we often fail to take the action that will lead us to achieve them. This is particularly true when it comes to our finances. And, with the holidays upon us, we may be tempted to take action that could distract us from achieving our financial goals by spending frivolously.
If you are lucky enough to get a bonus this year, consider starting a new investment, or making an additional contribution to an existing investment with a portion of this money, rather than spending it all during the holiday period.
Consider delaying spending on expensive items; instead, choose smaller indulgences or gifts for loved ones that do not impede on your long-term financial goals. This will help you make the strategic choices that allow you to enjoy the lifestyle you want, both now and in the future.
Here are a few great reasons why you should consider investing at least a portion of your bonus:
- Invested money creates money
When you invest, time allows your invested money to grow and compounding makes your money work harder for you. Given a long enough period to work, compounding can dramatically multiply the value of your investment so that less of your total investment will be from your contributions and more from growth.
- You help to buffer against the impact of inflation
Over the long term the risk of inflation eroding the buying power of your money is probably greater than the risk of volatility of the markets, which tends to be a shorter-term phenomenon.
Consumables and certain possessions, such as cars, do not protect you as these tend to lose value over time. The rising cost of living is a real issue and should be considered when planning for the future.
- An invested bonus gives you options
Building up an investment is important as it gives you options and buffers you against unforeseen elements. If you spend your bonus you forgo this opportunity.
- You will prevent buyer’s remorse
Every time we reach into our wallets we are making a choice between saving and spending; a choice that pits our future needs against what we need and want now. We often land up regretting what we have bought on a whim, or forgetting why it was so essential to have the item when we realise that the cash could have been spent better elsewhere.
- It is a step in the right direction to being financially secure
It is all too easy to justify spending now, as the effects of not having money to retire are only felt many, many years later. Investing a bonus is a step towards having enough when you need it. With each step it becomes easier and the benefits become more apparent.
Patience pays off
While it is tempting to focus on short-term gratification and avoid long-term decisions, your patience will pay off.
It is important to carefully research the investment options available to you and choose one to suit your time horizon, return objectives and your ability to stomach uncertainty or ups and downs in returns over different time periods. If you need help making financial decisions you should consider using an independent financial adviser.
Changing your financial behaviour, especially during the festive season, may have far-reaching consequences on your pocket down the line.