An annual bonus is a lump-sum payment made once a year on top of an employee’s normal salary or wage. Most employees earn annual bonuses equivalent to about 1% to 5% their overall salary. However, the annual bonus amount can vary greatly depending on company and employee performance and seniority. Some companies pay this at the end of the year or at the end of the financial year.
If you receive an annual bonus, there are many things you can do to improve your finances. Here are a few ways to invest your annual bonus and tips to help you make the best kind of investment for your personal and financial situation.
Pay off debt
For starters, it can be extremely helpful paying off any debt you may have. This includes credit cards and other loans. Paying down any credit card debt is usually best to work on first as they often have the highest interest rate. However, check which debts you have that incur the highest rate of interest. Being given an annual bonus can provide a great opportunity to pay off any or some debt you have.
Save an emergency fund
Saving up an emergency fund involves putting money aside to cover any financial struggles that may come up out of the blue. It’s recommended to save at least three months’ worth of living expenses to get you through financially difficult challenges that could arise. Putting an annual bonus towards this can help you save up for the future.
Build a diverse investment portfolio
Another option is to use your annual bonus money to invest. Building an investment portfolio with different forms of investment can supplement your income for the short and long term. There are a number of ways to invest, including through property, commodities, savings accounts, stocks and shares, bonds and alternative investments.
An index fund, a portfolio usually made up of bonds and stocks, is another example of investment and is especially popular among first-time investors. Instead of fund managers and analysts picking individual bonds or shares for you to invest in, the fund tracks the overall performance of a specific market index.
The best known index funds in the UK are FTSE 100, FTSE 250 and FTSE All-share. This can provide a passive form of investment and can diversify an investment portfolio. This can be a good investment to put your annual bonus towards. However, keep in mind that there are risks involved, especially when the market is volatile.
Investing in property is one of the most common forms of investment in the UK. And many people feel property should be one of the first investments to consider when looking at different ways to invest your money. With a long-term investment strategy, the UK property market has remained a stable sector to invest in.
Investing in property can be expensive upfront and tie up some of your cash. However, if you do your research and find the right property, it can turn into an especially lucrative investment. And an annual bonus can help you save money towards a deposit on a property.
Tips for investing your annual bonus or dividend
There are a range of different ways to invest your money. Take the time to research and assess the best options for you and your financial situation.
Avoid high risk investment strategies. It’s important to assess the level of risk with any investment. And diversifying your investment portfolio can help reduce risk and lessen the impact of poor performing investments.
On the flip side, don’t skip out on investing as it can dramatically improve your financial future. Forego the shiny new car, which often loses value as soon as it’s driven away, and the newest piece of tech that comes with a steep price tag.
With your bonus, prioritise investing for your financial future, so you can earn even more out of your annual bonus money.
Before considering any kind of investment, seek out professional financial advice, and ensure you find the best investment option for you and your personal circumstances.