4 Reasons not to Budget your Bonus

Finance
Reasons not to Budget your Bonus

It is the season where my wife to receives her annual performance bonus. She performed well and will receive a good bonus (proud of you honey), but this is something we do not budget for. We have never really budgeted for our bonuses which has some great advantages and has worked well for us.

Let’s first look at what bonus means. The common definition from google is “a sum of money added to a person’s wages as a reward for good performance”. I like the one a bit further down the list that states “an extra and unexpected advantage” which describes bonus in a bit of a different context. Although good performance is almost always positive towards your earnings potential, I like the “extra” and “unexpected” in the latter definition. We also view our bonusses as something extra and unexpected from a financial planning perspective.

Which bonuses should you not budget?

Well I believe all of them. Here are some examples of bonusses we have earned through our careers which we have never really budgeted for:

  • Performance Bonus: These are normally based on your individual performance but can also have some holistic company measures included. These holistic measures either has a weighting on the bonus or can be the entry ticket for getting a bonus. For example, if a certain revenue or profit target is achieved, bonusses will be awarded. The pitfall with these are that they can be hard to measure and driven by the perception of your superiors.
  • Company Target Bonus/Profit Share: These are purely based on your employer’s total performance. They can be nice in the good years and non-existent in the bad years.
  • Share Scheme: In my experience these are normally subject to change and in most cases based on company performance. The majority of times the shares must also be held or you must be employed for a certain term before they can potentially be liquidated. I love this method of incentivisation, but it is difficult to truly reflect this on your net worth.
  • 13th Cheque: Not sure if this is a common term but this is like an extra paycheque at the end of a certain period (in this case 1 year of monthly salaries). Although these are normally almost guaranteed we still do not budget them.

Four reasons not to budget your bonus

There are many reasons why you should not budget your bonus, but here is my short list of favourites:

  • The financial boost bonus. As you did not budget your bonus it can be used in multiple ways to improve your financial position. If you have been falling behind on your savings target, this can quickly fill that gap. If you have been saving for a specific purchase this can also accelerate you faster towards that purchase. In essence your bonus should have a boost to your overall net worth by either reducing debt, increasing assets or increasing future savings.
  • The freedom of choice bonus. As I previously eluded to, it is important that your finances create the available options you would like to choose from in the future. If you did not budget your bonus you can do with it whatever you want. This is far better than feeling guilty because you had something planned for it or even worse, you spent it before you actually received it. Even if you do not improve your financial position (which I would not recommend) you can blow it all without feeling guilty or impacting your budget.
  • The happiness bonus. Psychologically your bonus will feel exactly like what it is; a bonus. This might be counterproductive but is it not far more fun receiving something better than your expectations especially when you had no expectations? It also provides a sense of achievement that your hard work has been rewarded.
  • The income spike bonus. I believe that good budget application should have some rhythm to it, just like any good operation. If you are living every month within your budget your spending and savings will become more predictable and less volatile. If you do not budget your bonus you learn to live within your means, whether you get a bonus or not. This creates a rhythm of spending within certain tolerances. This rhythm is important and a bonus just provides a short-term spike to this rhythm which allows you to apply the previous 3 reasons. Therefore, if it is a bonus month or not, the rhythm just continues.

What should you do with your bonus?

Well that is the great news, exactly what you would like to do. I do however have one suggestion. Have a predetermined plan of what you would like to do with your bonus if you receive it. Instead of following my normal plan of earn, give, save, invest, life on the rest I would suggest to do the following. You have already earned it so go with give, treat yourself/celebrate it, save and invest. The percentage split between these are totally up to you. Although a bonus is a hopefully good net worth booster, celebrate it as well. Go out for dinner or buy that pair of shoes, after all you deserved it.

Always grow your wealth for tomorrow while being content with your wealth today.

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