A bonus can be a boost to your finances and allow you to make plans you’d never considered. You’ll always remember your first bonus, but as with so much in life, it’s important to take the time to think about what you do with it.
Whether you’re an investment banker expecting hundreds of thousands, or an employee of Greggs with a windfall of £300, the urge will always be there to splash your bonus on a holiday, or a car, or some other big one-off item.
That can be a great use of the money. But, for those thinking longer term, an annual bonus can also help to meet future financial goals.
In 2018, the average bonus paid to workers in the UK was £2,242, which could be comfortably enough to start saving or investing with. Of course, this sum often varies considerably by industry and your level of experience.
Below, we set out how you can make the most of your annual bonus.
The 80/20 rule
A bonus is a reward, so don’t feel guilty for spending a little bit of it on yourself. You’ve worked hard for it. A good guide might be to use the 80/20 rule – enjoy 20% of it now and allocate 80% towards your financial future.
For example, let’s assume you received roughly the average bonus. If you followed the 80/20 rule, you would have about £450 to spend today and about £1,800 to put towards bolstering your finances.
Boost your pension
Contributing to a pension is a great tax-efficient way to invest for your future. You’re likely to have already paid income tax on your bonus. Because of the tax relief that comes with paying into a pension, you have the chance to recoup the tax you’ve already paid – effectively, you could almost think of it as getting your bonus invested tax-free.
You’re probably paying into a workplace pension already, but you can also pay into a personal pension and keep a closer eye on how your money’s projected to perform.
Adding a one-off lump sum can significantly enlarge your pot, which, over time, can make a big difference to the sum you have when you retire. This can happen thanks to the power of compounding.
Pay for advice
We know that many people are put off investing because they aren’t comfortable with how it works. One way to tackle this is to use your bonus to pay for, and then act on, professional advice.
An hour or two prioritising your goals with a trained expert can change your financial future, so it’s well worth considering. For those who need a little extra help, Nutmeg offers a one-to-one advice service where one of our financial advisers will offer you tailored recommendations based on your personal situation.
Open a stocks and shares ISA or a Lifetime ISA
If you’re a first-time house buyer aged 18-39, a Lifetime ISA is a great way to start investing towards your first property. It can also be used for your retirement. The government gives a 25% bonus on top of the contributions you make to the Lifetime ISA. You are allowed to invest up to £4,000 a year in a Lifetime ISA.
At Nutmeg, we build portfolios for our stocks and shares ISA and Lifetime ISA products based on how much risk you want to take and what your financial goals are.
Take the chance to enhance it – make your bonus count for more
Investing your bonus for the long haul means it could potentially be worth much more to you in future than it is now. That’s because of the power of compounding, otherwise known as returns on your returns. While it might seem tempting to start spending straight away, there may be more to be gained from balancing short-term needs with long-term goals.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatments depend on individual circumstances and may be subject to change in the future. Past and future performance indicators are not a reliable indicator of future performance. Nutmeg offers fully regulated restricted financial advice.