A bonus is often seen as a windfall rather than part of overall compensation, which is generally a mistake.everydayplus/iStockPhoto / Getty Images
Bonuses are a big deal this year. According to a survey by employment agency Robert Half, 95 per cent of Canadian companies planned to award year-end bonuses at the end of 2024.
But with a bonus comes a big decision about what to do with it.
“It’s human nature that we get a lump sum and we want to spend it or splurge on something,” says Stephanie Dean, manager, financial literacy, at RBC Wealth Management in Victoria. “We tell ourselves we deserve it, and sometimes don’t fully think that through.”
Ms. Dean says many clients assume they’ll receive a bonus and begin spending it long before it arrives. Others treat the lump sum as a gift and splurge on a luxe purchase or lavish vacation. Ultimately, the bonus is seen as a windfall rather than part of the client’s overall compensation – and that’s generally a mistake.
Ingrid Kucera, financial advisor with McClelland Financial Group at Assante Capital Management Ltd. in Markham, Ont., tells clients to view their bonuses in a more holistic light.
Paying off high-interest debt is paramount. Depending on their debt load, she recommends clients save 20 per cent of their salary a year – which includes the bonus – and suggests tax-deferred or tax-free vehicles such as RRSPs and TFSAs, depending on a client’s contribution levels.
As for clients who have maxed out their RRSPs and TFSAs, “If they’re hitting their savings goals within other avenues of regular pay, then they shouldn’t feel bad for spending some of it because you have to find a balance between saving for the future and enjoying your life now,” Ms. Kucera says.
“Buy yourself something nice.”
Ideally, clients should be sitting down with their advisors well in advance of a bonus to make the best long-term decision about their overall income, says Devin Cattelan, certified financial planner and portfolio manager at Verecan Capital Management Inc. in Toronto.
Here are some other considerations advisors should share with clients:
Don’t spend the bonus before you receive it. While an organization may have awarded bonuses annually in the past, reduced profits or other factors could get in the way. That’s why it’s important not to spend the bonus before it’s received or to overestimate the amount. And don’t forget there are going to be taxes taken off, Mr. Cattelan says.
Weigh your obligations. If a client has a lot of credit card debt with an interest rate of more than 20 per cent, paying that off should be the focus, Mr. Cattelan says. But if a client is carrying a mortgage that hasn’t come up for renewal and is paying 1.9 per cent on it, “maybe there could be better ways of allocating that cash,” he says, adding that each case is unique.
“If you’re in a high tax bracket, maybe it makes sense to make an RRSP contribution over paying down the debt because you get so much back,” he says.
Splurge responsibly. If a client feels they can afford to spend a portion of the bonus, planning exactly how much to spend in advance can ensure there are no impulsive decisions, Ms. Dean says.
“If you decide ahead of time that it’s 10 per cent or 30 per cent that you’re going to allow yourself to spend, and then direct the rest toward your goals,” that’s fine, she says.
Set realistic goals. Advisors have to be realistic about client behaviour, Ms. Kucera says. “A lot of people will say they’ll save the whole bonus, which is great,” she says. “But when you set a goal too high, a lot of clients don’t tend to reach it.” She says realistic savings goals are more likely to be met.
Be disciplined. Ms. Kucera says clients should build in savings on a weekly or biweekly basis. “That way, when they get their bonus, maybe they only have to save 40 per cent or 50 per cent of it, because they’re already hitting their savings goals,” she says.
Automate the process. An easy way to dodge temptation is to recommend clients have their employer automatically deposit the bonus in a vehicle such as a group RRSP, Ms. Kucera says. That allows the client to invest the money without paying taxes upfront.
What’s important is that clients and advisors carry on regular communication about compensation throughout the year, Ms. Dean says.
“It’s important to have a relationship with somebody who can walk you through these options to say what makes the most sense for you,” she says.