The Ultimate Guide on What To Do With Your Year-End Bonus

Credit: http://www.flickr.com/photos/muppethouse/341714428/sizes/m/in/photostream/So last week, I had surgery to remove TWO of my wisdom teeth – one on each side. Now, if you’ve ever had your wisdom teeth extracted, you’ll know that the operation is relatively painless, but the aftermath hurts like a b****. Seriously. Try stuffing 2 golf balls in your mouth and you’ll get an idea of what it’s like. Owtch.

On the bright side, it left me with a surprisingly long SEVEN-DAY medical leave from work (Though I spent the first half of it writhing in pain). Pain or no pain, a weeklong break from work is awesome. I caught up on my sleep, reorganized my room, and watched like 20 episodes of Modern Family (which is awesome btw, go watch it).

How to Handle Unexpected (Nice) Surprises

A weeklong break from work is a nice surprise, and so is the other great institution of a regular job: the year-end bonus (or “13-month bonus” as it’s commonly known in Singapore).

It feels pretty damn awesome to receive a year-end bonus, even though it’s not really a true “bonus” per se. So what are you going to do with your year-end bonus this year? Here are 5 possible options:

1. Spend it – What most consumer sheep will do. “Ooh extra money! Time to buy an iPad/massage chair/goat NOMNOMNOMNOM” (coupled with crazed look in their eyes)

2. Save it – What most people will do with the remainder after they’ve purchased said iPad/massage chair/goat. Be sure to take your shopping home in a cab – the possibility of upcoming bus fare increases might leave you with a remainder of maybe $4.70.

3. Sock it into a tax-sheltered SRS account – What very few people will do but could save you hundreds of dollars in taxes next year, depending on your tax rate.

4. Invest it – What old uncles will do (also with crazed looks in their eyes)

5. All of the above – what I think you should do.

Credit: http://www.flickr.com/photos/nicubunuphotos/5296305774/sizes/m/in/photostream/This is what your bonus will look like if SMRT increases its bus fares

The All Of The Above Option

There’s really no reason why you should limit yourself to one or two choices with your year-end bonus. Instead, see your bonus as a way to give a boost to everything that will improve your life. Here’s how I’m allocating my year-end bonus this year:

1. Spend 10% of it on whatever I want – In true L’Oreal wisdom: “Because I’m worth it.”

2. Save 45% of it by adding it to the house downpayment fund

3. Sock 45% of it into my SRS account. Ta-dahhh: instant tax savings!

4. Invest the amount in the SRS account in a portfolio of sensible index ETFs

The great thing about this formula is that it lets me resist the temptation of overspending, meets my dual objectives of saving and investing, AND it saves me money on taxes next year to boot. Awesomesauce.

Do It Now

Most people get really ambitious when it comes to planning their time and money. We plan to use our time to get through our to-do lists, and we plan to save and invest our money.

But our plans inadvertently break down once time and money unexpectedly fall into our laps. Instead, we’ll spend our medical leave watching Modern Family, and squander our year-end bonuses on iPads which will probably become obsolete in 6-9 months.

Don’t make the same mistake as the other consumer sheep. Make a decision on the percentage of your bonus that you’re going to spend/save/invest. Then transfer the amounts to the relevant accounts immediately. If you’re reading this outside, set a reminder to do this once you get home. And if you’re home, do it now. If you put this off till later, you’ll run the risk of it disappearing mysteriously. Seriously. Do it now.

Are you done?

Okay, now you can go reward yourself with a couple of episodes of Modern Family. 😉

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How to Hide Money Like a Criminal Mastermind

Let’s do a little role play. You are an international criminal mastermind, wanted by the authorities in 14 countries. Your crime ring has prospered, earning you an obscene amount of money. You could buy over a small country (or attend a Mitt Romney fundraiser) if you wanted to. You’ve also covered your tracks well. The police have got nothing on you, so they’re targeting the easiest piece of evidence they can find – your money.

Tipped off by your trusty financial advisor, you move your money in small parts to a secret bank account in the Cayman Islands. By the time the police crack open your “official” bank accounts, they can’t find anything to charge you with. So once again, you escape scott-free… and tax-free.

The awesomeness of tax-advantaged accounts

Death and taxes are the only 2 sure things in life (That, and the fact that you can never find your keys when you’re late for work on Monday morning).

You can’t escape the first, but you can totally lower the second… legally. You may not have a secret Cayman Islands bank account, but the governments of the world, in their benevolence, have offered the next best thing: tax-advantaged accounts.

I’ll talk about tax-advantaged accounts for Singaporeans, or people living in Singapore, in this post. Americans, you already have more than enough information out there on your tax-advantage accounts – Google it. (Hint: Sign up for a 401k and contribute enough to max out your employer match. You guys are so lucky).

Singaporeans – you have a little-known account called a Supplementary Retirement Scheme (SRS). The SRS is sort of like a beautiful exotic girl who’s been hidden on an island. She’s got a weird-sounding name, not many people have heard of her, but she’s got huge… benefits.

The photographer claims that the girl just *happened* to walk into the shot and he just *happened* to press the shutter. Honest!

Why the SRS is awesome

1. It gives you tax-benefits

Think of the SRS as your own secret tax-free bank account for you to stash a whole bunch of moolah in. Every dollar you contribute into that bank account reduces your taxable income by a dollar.

So if your tax rate is 7%, contributing $12,750 a year effectively saves you $892.50 in taxes every year. Ta-dahhhh, you just earned your next weekend getaway vacation! You’re welcome.

It’s purely voluntary, meaning that you can contribute any amount you like, up to a cap of $12,750 a year (Yeah, the government realizes how awesome this is too, so they’ve gotta put a limit on how much you can screw them over by not paying taxes).

 2. It boosts your investments

What are you gonna do with all that money you’ve put into it? Don’t be a kuku and just leave it sitting there (remember my post on Don’t Save For Retirement?). Instead, invest it – preferably in a couple of index-based ETFs – and let your money grow absolutely tax-free.

There’s also a hidden benefit to investing that cash. By not paying $893 in taxes, that means that you’ve earned a guaranteed 7% return on your $12,750 for that year (ie: if you invested that $12,750, your investment would have had to grow by approximately 7% just to match the tax savings).

If you can resist the temptation to withdraw your investments till you’re 62, you’ll only be taxed for 50% of the prevailing tax rate. That may seem annoying at first, but ask yourself:

Would you rather pay 1) a 10% tax on $100,000, or 2) a 5% tax on $1,600,000? (Hint: The answer is option 2).

Sure, option 2 entails you paying more in taxes, but it also means that you have ONE POINT FIVE MILLION DOLLARS to play with after tax. Paying more tax is a good thing – it means you’re richer. By not paying tax initially and deferring it till the end, you’re effectively allowing your whole amount of cash to work harder for you. 

3. It’s flexible on withdrawals

Unlike CPF, you’re allowed to withdraw your cash pretty much anytime you like.  It’s meant to be kept till you’re retired, but if you really need the cash before you’re 62 you’ll have to pay a 5% penalty and get taxed for 100% of the rate (The penalty is waived if it’s withdrawn in the event of death or medical cases). It’s annoying to have to pay those, but at least you still get access to it if you really need it for an emergency.

“What are we gonna do tonight, Brain?” “The same thing we do every night Pinky… Try to open a TAX-ADVANTAGED ACCOUNT!”

How to set up your own criminal mastermind account

1. Contact any one of the three local banks (DBS / OCBC / UOB) to set up an SRS account. If you already have another savings account with those banks, you probably won’t even need to visit the branch – just download the application form from their websites. If you’re Singaporean, all you need is a copy of your NRIC.

2. You won’t even need to make a claim in your annual tax return – it’ll be automatically done for you through your SRS operator. Yay to #FirstWorldAwesomeness 🙂

3. If you’re a foreigner living in Singapore, the contribution cap is different, but all of the above apply to you too. You’ll also have to submit an annual IRAS declaration form.

And finally…

Congratulations – you’ve now embarked on your journey towards being a world-class, financially-savvy criminal mastermind. So if you’ve got nothing to do tonight, maybe you can try to TAKE OVER THE WORLD!

Don’t Save For Retirement

It is close to midnight on December 29, 1972, and Eastern Air Lines Flight 401 is making its final approach to Miami International Airport. 163 passengers are onboard, most hoping to enjoy their new year in sunny Miami.

As it approaches the airport, the landing wheels are lowered and locked into position. At this point, the captain notices something amiss: the green light linked to the landing wheels has failed to light up. This could mean one of two things: Either the wheels have failed to lock into position, or the light is faulty. The pilots report the situation to Air Traffic Control, who orders the plane to circle back and try their descent again.

At this point, the pilot and co-pilot fixate on the light. They take it out of its fitting, blow on it to remove dust, and try to jam it back. Their conversation goes back and forth as they try to figure out what the fault is. They become so fixated on the light, that they fail to notice the 300-pound gorilla in their midst.

The gorilla, in this case, is the fact that their autopilot is disengaged and that they are rapidly losing altitude. They don’t notice that they are dropping rapidly because it is a moonless night and they can’t see the horizon. The altitude warning alarm rings through the cockpit and the altitude meter is dropping crazily, though neither pilot notices. They are too fixated on the light. Only when the aircraft is 7 seconds to impact, do the pilots realize that something is very wrong. They take evasive action, but it’s too late. The plane crashes, killing 101 people.

Crash investigators later found that the wheels had indeed locked into place – it was the light that was faulty. “The crash occurred due to the failure of a $12 piece of kit,” one journalist pointed out. However, the true cause of the crash was deeper than that – it was the pilots’ fixation on one particular problem, which blinded them from the true danger they were in.*

*story taken from Bounce by Matthew Syed

What other gorillas are you failing to see in your life?

Like the pilots who were overfocused on the green landing gear light, most people are fixated on one goal when it comes to personal finance: retirement. They believe that in order to retire, they need to hoard as much cash as possible, starting now. But they fail to realize the huge gorilla charging towards their bank accounts: inflation.

Two posts ago, I wrote about how inflation would slowly but surely destroy the buying power of your savings. If you’re young, letting your cash sit in your bank account (or in your fixed deposits / CPF / mattress) is like putting it in a nest of termites: it’ll eventually get eaten up.

So here’s my advice when it comes to inflation: Don’t save for retirement.

Say what?

Hear me out for a second. If you’re young and wild and free, there are other, more important things you should be focusing your attention on. Instead of saving up for “retirement” and getting a lot less bang for your buck, there are three more useful things you should be directing your money towards:

1.Save for assets

The best way to tackle the inflation gorilla is to put your money into assets that will grow faster than inflation: Stocks and real estate. Stocks are the most accessible because they don’t require a huge cash outlay, they’re easy to understand, and if you live in Singapore, they’re tax-free. Woot woot! Real estate is pretty nifty too, if you can afford the huge downpayment (or if you can’t afford the huge downpayment, you can also look into REITs – more on that later).

The biggest bonus of all is that if you plough your cash into assets that exceed inflation, you will, in fact, be prepping yourself for retirement.

2. Save for life chapters

Here, I’m talking about big, life chapters that you were planning on spending on regardless of what happens. I’m talking about your wedding, your first house, and your daughter’s upcoming college fees. If any of these are going to be happening within the next 10 years, then you should be saving up for them. Don’t act as if you didn’t know they were coming: If you know you’ll be getting married in 3 years, you should be saving up for your hypothetical $30,000 banquet and $15,000 ring… now.

A caveat: I’m not talking about cars, or vacations, or that new washing machine, that you “know” you’re going to spend on anyway. I’m talking about the big, necessary, life chapters here, people.

3. Save for emergencies

Sh*t happens. You’ll need cash to deal with it. If something bad happens, (like losing your job) the last thing you want is to be dipping into your investments to pay for your meals. If you don’t have an emergency fund of 3 months of income parked in an easily accessible bank account, then you should totally start saving up for one now.

In short…

Don’t bother saving for retirement – inflation will render your efforts futile. Other than cash set aside for emergencies and stuff you’re going to spend on within the next 10 years, everything else should be directed towards assets – Assets that keep pace with inflation. If an insurance agent / banker tries to sell you a fancy schmancy 50-year savings plan, run as fast as you can.

Don’t get too fixated on the wrong things. Just because personal finance “experts” tell you that you should be saving for retirement, doesn’t mean that you should be blindly stuffing cash into a bank account. Keep an eye out for the inflation gorilla in your midst, and take action to deal with it.

PS: the topic for this post came from a friend who replied to my previous post on spending money. To everyone reading this, keep the comments coming! They totally give me the inspiration for future blog posts.

As a young person, what do you think about the 3 ways you should be putting your money towards, instead of saving for retirement? Leave a comment, or drop me an email at cheerfulegg@gmail.com. Hope to hear from you soon 🙂