Political turmoil and economic uncertainty continue to dominate the news cycle. Companies are starting to feel the pinch as the world settles into another financially difficult year. If you are fortunate enough to receive a bonus at some stage think extra carefully about this decision: Save it or spend it?
Our short term wants and needs often get in the way of our dreams and long-term goals, particularly when it concerns our finances. We are all too easily swayed into spending frivolously, which could affect our long-term financial goals.
Consider using any bonus (or at the very least part of it) to start a new investment or make additional contributions to your existing investment(s). Choose smaller gifts and indulgences for loved ones over expensive items. Consider your financial goals when making strategic choices so that you are able to enjoy the lifestyle you want now and in the future.
Let’s look at a few excellent reasons to invest, at the very least, a portion of your bonus:
The money you invest creates money
Investing allows your money to have the time to grow and compound. Compound interest makes your money work for you. Over time compounding will dramatically increase the value of your investment, so that more of your total investment comes from growth and less will come from contributions. Your financial advisor can assist you with this, for example he can let you know which unit trusts are well priced and advise on which to buy.
Buffer against the impact of inflation
Inflation erodes the buying power of your money over the long term. In fact it is probably a greater risk than market volatility, which is usually a short-term phenomenon.
Consumables and many possessions (such as vehicles) tend to lose value over time and do not protect against inflation. Cost of living is an important issue and must be considered when planning your future.
You will have more options
Building up your investment buffers against unforeseen elements and gives you more options. Spending your bonus forfeits those options.
No buyer’s remorse
The choice between spending and saving pits our future needs against our current wants. Impulsive spending often leads to regret. Carefully consider why you wanted the item in the first place. You will soon realize that the money could be better spent elsewhere.
It’s a step in the direction of financial security
For many people retirement is something in the distant future. This separation from your eventual reality makes it easier to justify impulsive spending. Using your bonus responsibly is a step towards security. Each step becomes easier and very soon you will be able to see the benefits.
Do not be tempted by short-term delights and face those long-term decisions head on. Your patience will pay off.
Carefully research all the options available to you and choose one that suits your long-term goals. Consider your return objectives, the risks and your time horizon when making your decisions. If it all becomes a bit overwhelming then consider consulting an independent financial advisor.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.