If you just earned a bonus from your employer or received an unexpected sum of money, how should you use that bonus if you also have debt? I talk with Scott Terrio and we outline what to prioritize to get the most bang for your buck. We also take a look at common mistakes people make when they receive a surprise lump sum of money and discuss the impact a bonus can have on a bankruptcy filing.
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9 Ways to Spend Your Bonus Wisely
It’s easy to get caught-up in the excitement of having extra cash. To make the most of it, Scott suggests thinking about the following priorities:
- Make sure you’re up-to-date on necessities like hydro, water and rent.
- Next, prioritize secured debt payments like your mortgage and car loan to avoid the risk that your secured creditor may take legal action to seize you home or car if you are behind on payments.
- Pay down high interest debt. When you prioritize repayment based on the highest interest rate first, you save on interest costs.
- Prioritize callable debts. A callable debt is a loan that can have its terms changed at any given time. Your lender can raise the interest rate or reduce your credit limit with little notice. Paying down variable rate loans is a good idea when interest rates are rising.
- If you have no unsecured debt, put your cash towards an emergency fund for unexpected life events.
- Consider making a bonus or extra payment on your mortgage or car loan.
- If your debts are under control, take full advantage of tax incentive savings programs like RESPs or a TFSA.
- Next think long term, consider putting any windfall in an RRSP for your retirement.
- If your debt and savings priorities are met, invest the rest.
Avoid Common Mistakes
A surprise bonus, while great, can impede your ability to be rational. Scott argues that not stopping to reflect is the most common mistake people make. Other errors to avoid include:
- Paying off a credit card, then reusing it. If you paid off a credit card with your bonus, cut up the card immediately after or at least lower your credit limit. This way, you avoid the temptation of using your credit card as debt again and racking up more balances.
- Spending the gross amount instead of net. Make sure that you’re only spending the post-tax amount of your bonus (the net income) instead of the gross. You might be told you’re getting a $1000 bonus, but after-tax, that amount might only be $700.
- Using the money as a deposit on a big purchase and taking on more debt. For example, you might be tempted to use the money to purchase new car. The problem with that is you are likely taking on more debt, rather than dealing with the debt you have.
- Paying one creditor over another. If you’re struggling to make even your minimum debt payments, we recommend you meet with a Licensed Insolvency Trustee before using your bonus to pay down a loan. The reason for this is to avoid favouring one creditor over another without solving the whole debt problem. A Trustee can help you be strategic with how to use your bonus to arrange a settlement offer with your creditors. If your bonus is large enough, you might be able to pay off all your creditors at once with a lump sum consumer proposal.
If You’ve Filed for Bankruptcy
Any income you receive during a bankruptcy filing must be reported, according to the Bankruptcy and Insolvency Act. This includes a holiday cash bonus. Depending on the amount you receive, it may put you over your monthly bankruptcy surplus income threshold. If this is the case, it would extend the length of your bankruptcy from 9 to 21 months.
However, you can prevent a longer bankruptcy filing by being upfront about your financial picture before you file. Your Trustee will likely ask you if you expect to receive any bonuses or raises in addition to your regular pay. If it’s determined that your income goes above the bankruptcy threshold, you might file a consumer proposal instead. With a consumer proposal, you make monthly lump-sum payments. Any extra money you receive throughout the year will be yours to keep with no effect on your filing duration.
For more a more detailed look at how to treat a bonus or unexpected cash, tune in to the podcast or read the complete transcript below.
Additional Resources