How to Create a Spending Plan For Your BonusesApr 11, 2023
Many of my clients typically receive their annual bonuses from their company by the end of Q1. As such, I often get the question, “How can I make the most out of my bonus?”
Now, every person will be in a different life stage and have their own goals. So it’s only natural that the answers would vary per person. Given this, I’ll be sharing my simple framework on how I help clients decide on how to make the most out of their bonus so that it progresses them towards their many life goals, aka create a spending plan!
By the end of this article, my goal is that you’ll have both the steps and the confidence to create a spending plan that you’ll be excited about!
Let’s get started.
Don’t Say “Budget”, Use “Spending Plan”
Before I talk about the exact steps on how to make the most out of your bonus, we must first use words that are more exciting.
That’s why I try to avoid using “budget” and instead use “spending plan” more.
What’s the difference, you ask?
A spending plan and a budget are both ways of allocating money to different needs and wants. A budget, however, tends to have a more limiting element. Example: “The budget for this trip is $5,000." Whereas a spending plan is often more encouraging and liberating, “Let’s spend $5,000 on this trip!”
Now here’s why this change makes a huge difference:
To make a ‘budget’ work, it’s often the whole family (you, your spouse, your parents, and your children) that makes it work. So right from the start, if we use the term ‘budget’, it often fails to get ‘excitement’ from others. As a result, the entire process becomes a slog and feels forced upon those who have to ‘follow’ the budget.
Whereas if you say, “Let’s make a spending plan for the trip!” it is a lot more inviting.
This is one of the secrets to getting buy-in from your family members. Stop using ‘budget’ and instead use ‘spending plan’.
With that said, let’s begin with how to create a spending plan.
Step #1: Identify What’s Important In Life Now
Money has different purposes. The initial task in creating a spending plan is to identify the purpose of money in your life right now.
To help with this, let me share the six most common purposes of money:
- Basic Needs - This is the most basic purpose of money. It's about having enough funds to cover daily living expenses that keep us alive and healthy like food, housing, utilities, clothing, etc.
- Quality of Life - Once the basic needs are covered, people tend to spend on improving their comfort in their day-to-day lives. This can include things like eating out, furnishing the home, trying out new experiences, and basically anything that brings us joy and reduces stress in life.
- Life Milestones - These are the things we want to accomplish in our lifetime. Examples of these include traveling, buying their dream car or home, getting married, etc. It’s going to be different for each person, however, the ultimate outcome of a ‘milestone spend’ is that it gives you long-term fulfillment.
- Security - This refers to the feeling of security and stability, especially in times of crisis or uncertainty. This can include saving funds for emergencies and availing of different kinds of insurance. Whenever we spend for security, the feeling it gives us is peace of mind.
- Long-Term Future - This area of spending helps us build a better future for ourselves and our loved ones. Long-term investments in real estate, bonds, and mutual funds are included here. But it can also mean investing in ourselves and our skills, like getting additional training or certifications that can improve career opportunities.
- Giving - Last but definitely not least, money is a tool for helping others and creating a positive impact in the world for the advocacies you care about. This includes contributing to charities we believe in or helping out friends in need. Overall, the feeling this area gives us is a sense of connectedness to others and making a difference.
Now keep in mind that these are all subjective and will vary from one person to another. For example, booking a business class flight ticket is already a milestone for one person, while for another, it can fall under comfort as it’ll be a long flight. Two people can spend money on the same thing but identify it with a completely different purpose. So how an ‘item or activity’ is classified is actually not that important.
What is important (after reviewing the purposes of money) is reflecting on these questions:
- What purpose of money have you been mostly spending on?
- What purpose of money would you like to spend MORE on?
Give yourself (and also include your spouse) some time to answer these questions to find out which purpose of money ‘stands out’ for you.
This will then point you in the right direction on where to allocate your bonus so that it improves your experience of life.
At this point, some clients will want to allocate a portion of their bonus to either security or to improve their long-term future. To do this well, we now go to the different financial stages…
Step #2: Know Your Current Financial Stage
There are 6 financial stages that build upon each other. So each stage serves as a foundation for the other. Here are the 6 financial stages.
- Increase Cashflow (so that your month-to-month generates savings)
- Get Out of Debt (mainly credit card and other high-interest debts)
- Create an Emergency Fund (savings of at least 3 months worth of expenses)
- Ensure Proper Protection (through insurance)
- Build Long-Term Savings (through investments)
- Preserve Your Estate (through estate planning)
When finances are improved in this order, it can snowball into accumulating wealth.
- Starting with income (cash flow), the more cash flow you have, the faster debts can be paid off.
- Fewer debts mean you have fewer expenses allowing you to save up for your emergency fund.
- When the emergency fund is completed, you’re now able to fund protection for life’s uncertainties through insurance products.
- Having ample insurance will then ensure that any investments won’t have to be suddenly sold or liquidated at a loss when we or our loved ones encounter an accident or medical emergency.
- Because investments are protected, they grow well and build up over the long term. This then forms your estate which eventually will be passed on to the next generation.
By identifying where you are in the 6 financial stages, you can effectively allocate your bonus by putting it in the area that will progress you to the next step. Meaning:
- If you still have high-interest debts, then use the bonus to pay off debts.
- If you are still building an emergency fund, then use the bonus to jumpstart or complete your emergency fund.
- If you already have ample savings, then use the bonus to get proper protection.
- If you’re already well protected, then use the bonus to invest for long-term goals.
- If your long-term goals are already secured, then use the bonus for preparing the next generation.
So the quick questions to answer for this step are:
- Which financial stage are you in?
- How much of your bonus do you want to allocate for your financial goals? (While the rest goes to your other life goals.)
After all this, you can now finalize your spending plan for your bonus.
Step #3: Create Your Spending Plan
“But Jess, what do YOU recommend on how to BEST allocate the bonus?”
From experience, the best spending plan is the one that gets followed. This means the plan that you come up with must capture both your and your family members’ needs and wants, and it must be exciting!
To give you an idea of how to do this, let me share an example:
Kim and Andrei are both employed by a multinational company. One is already a director, and one is a manager. They have a 9-year-old daughter who is going to a local school.
When asked about “What’s Important” to them, they highly value security and ensuring a good future for themselves. They are not so big on spending for “comfort” and "lifestyle," and they also do not like to travel much as it disturbs their daily routine. As such, they only travel 1-2 times a year to their home countries.
But what they are excited to spend on though is their future home when they finally decide to settle down. Currently, they are still renting because they don’t know where they’ll live yet.
For their financial stage, they are already in the stage of Building Long-Term Savings. They don’t have debts and already have ample emergency savings worth six months of their monthly expenses (however, on this, their goal is to build up to 12). They have also secured the right insurance products.
So when they received their combined bonus amounting to roughly $90,000, here is what their spending plan looked like:
- 12% or $10,800 was set aside for the taxes on the bonus.
- 10% or $9,000 was for donations which they’ll spread throughout the year.
- 22% or $20,000 was set aside for their two international travels for the year.
- Of the remaining $50,200, they divided it equally into three.
- $16,733 went to their emergency fund so they can add an additional month’s worth of their expenses as savings.
- $16,733 was to be a medium-term investment (5-10 years) for funding their future home.
- $16,733 was for their daughter's educational fund which was put in a long-term investment (10+ years).
- They did not allocate any amount for their retirement since their savings for retirement are already built-in to their monthly spending plan.
Now, for every individual and family out there, the plan can be different. Again, this will depend on what is important to you at this stage in your life. Remember that money is a tool, and we must be intentional in using it so that we also get the most out of it.
By reviewing the different purposes of money and the different financial stages, remember that you can divide your bonus so it progresses you in multiple areas of life.
Whether you use it for travel, education, new adventures, donations to charity, getting out of debt, saving or investing, or simply treating yourself and your loved ones… go and spend your money intentionally and with purpose. What you want and need will differ from others, and that’s totally normal. Let your focus be on what’s important for you and your family.
Final Note: Have Zero Guilt In Spending
As a final note, in deciding where you’ll spend your bonus…
The overall purpose of money is to be spent. Even when you save money, you're simply planning to spend it sometime in the future. And even when you give money away, of course, the money will still be spent, either by the person who received your money (whether it’s a charitable institution) or the next generation.
So as you go about this process of making your spending plan, I hope you remove all elements of ‘should haves’ or the ‘best way’ or the ‘right way’ to go about it. As long as you are intentional with your spending, and you are excited by it, then it is already a good spending plan.
Lastly, congratulations on earning this bonus! I’m happy for you, and I hope this short guide helped you create a spending plan for it.
Now if ever you’d want to do a more comprehensive and holistic financial review and planning for your future… Or if you’re curious about which best financial vehicles (whether it be insurance or investments) would be best suited for your goals…
Then don’t hesitate to reach out! I’d be happy to guide you through the financial planning process so you make the most of your money. Schedule a call with me here and let's maximize your wealth potential!
Congratulations again on your bonus and happy spending!