Article hero image

How to Do the Right Thing with a Bonus (or Any Extra $$$)

Wealthsimple makes powerful financial tools to help you grow and manage your money. Learn more

Bonuses. They're magical things. Sometimes you're expecting them — Wall Street is famous for these, the kind you count on, the kind that often come with lots of zeros. Sometimes you're not — maybe you happened to do an insanely good job this year, or maybe the company did exceptionally well and the bosses are good enough not to hoard the profits. The thing to remember is that bonuses are the same as any chunk of money one comes into, and as such, the smartest strategy for your bonus is the same as the smartest strategy for folks who get a big Christmas gift or a small inheritance from their great aunt. (Our advice for great-aunt-inheritors is, likewise, the same as our advice to Wall Street bonus-getters.)

And no, our advice is not “a new Tesla would look great with those shoes.”

TLDR Newsletter Logo

Sign up for our weekly non-boring newsletter about money, markets, and more. Sorry, TLDR is currently available in English only.

By providing your email, you are consenting to receive communications from Wealthsimple Media Inc. Visit our Privacy Policy for more info, or contact us at privacy@wealthsimple.com or 80 Spadina Ave., Toronto, ON.

To design a guide for bonuses (and other windfalls), we talked to two learned money experts: Andrea Coombes, an investing and retirement specialist for NerdWallet, who's spent 16 years helping people manage their finances better; and our own Michael Allen, Wealthsimple advisor, who helps design our clients' money strategies.

First rule? “If you’re getting a bonus this year, the most important thing is get it out of your chequing account,” Coombes says. Not only are you earning terrible returns, but “that's the best way for it to disappear without your even realizing it.” And after that? Here's our five step plan.

#1 Wipe Out Your High-Rate Debt

If you're paying double-digit interest on anything — credit cards often come with rates of more than 18%, and some student loans can be particularly brutal, for instance — use your bonus to pay that debt off before you do anything else. Your first priority should always be to eliminate any debt with “an interest rate that’s higher than what you could earn on that money somewhere else,” Coombes says. The stock market's historical long-term returns are about 7.5%.

Michael Allen advises Wealthsimple clients to pay off any debt with a rate higher than 5%.

And keep an eye on your overall debt as well. “We recommend to our clients that they keep a debt to income ratio that's no more than 2.5:1,” Allen says. So multiply your income by 2.5 — if that number is smaller than the outstanding debt you have, it's probably a good idea to pay it down.

#2 Establish an Emergency Fund

Allen recommends keeping an emergency fund of between three and six months of living expenses. This will give you peace of mind in case you lose your job or can't work for other reasons. Coombes says it's also a good idea to keep some money handy in case of unforeseen expenses — your transmission turns into garbage, your roof turns into a sieve, a tree falls on your helipad. That way you won't need to go into (high-interest) debt to deal with it. “Those one-off expenses are bound to happen, but you don’t necessarily have them covered in your monthly budgets.”

Recommended for you

  • Canadians Say They Need $1.7M to Retire. We Calculated How to Get There

    Finance for Humans

  • How Do I Diversify, Anyway?

    Finance for Humans

  • Canadians Are Keeping Their Money in Cash. It’s Risky.

    Finance for Humans

  • Wealthsimple Explains: The Market Crashed! Should I Buy the Dip?

    Finance for Humans

Where should you stash your emergency fund? Allen recommends keeping it separate from the money you use for monthly expenses — a savings or money market account is perfect.

#3 Make Long-term Investments

“It’s hard for people, especially younger folks, to think about retirement,” Coombes says. “It’s decades in the future! But young adults have this amazing asset that they ignore at their peril: time. Their money has time to grow.”

Where to start? The first thing to do is max out your tax-advantaged retirement accounts such as a TFSA or RRSP.

And if you've already maxed out your RRSP or TFSA, move on to an individual investment account.

#4. Shrink Your Tax Bill

Getting a bonus means paying taxes on a bonus. The best way to lighten that load? For a lot of investors it's investing in an RRSP. Every dollar you contribute to an RRSP means a dollar off your taxable income (up to the yearly limit of course).

(We’ve updated the above paragraph in the Canadian version of this article to clarify how your bonus affects your taxes. Thanks to a reader via Reddit for the heads up!)

And it's not too late. You have until March 1st to make contributions and lower your tax burden for 2017.

#5 Spend it! Maybe on Something that Holds Value

As Coombes reminds us, “It is a bonus. It’s a nice little gift. You might want to use it for some fun.” Money should be used for enjoying your life, after all. Even Portfolio Managers know that. Allen suggests that, as long as you're not dealing with major high-interest debt, blowing no more than 15-20% of your bonus on something fun unless you've got a big expense coming your way, like down payment on a home or maternity leave. A weekend away, a new handbag or pair of jeans, depending on the amount.

Or you know what's a good time? A socially responsible investment portfolio! It's great for parties. At least if you party with Wealthsimple advisors. Which you should. They're fun.

Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money. Invest, save, trade, and even do your taxes in a better, simpler way.

Money Diaries

"MY UNDERGRADUATE ADVISER TOLD ME I SHOULD JUST FORGET ABOUT THE WHOLE WRITING THING. ‘YOU SHOULD FIND A GOOD MAN AND GET MARRIED,’ HE TOLD ME."

Margaret Atwood

TLDR Newsletter

Business news made simple

Sign up for our weekly non-boring newsletter about money, markets, and more. Sorry, TLDR is currently available in English only.

By providing your email, you are consenting to receive communications from Wealthsimple Media Inc. Visit our Privacy Policy for more info, or contact us at privacy@wealthsimple.com or 80 Spadina Ave., Toronto, ON.

  • Finance for Humans

    Is it Better to Pay Down Your Mortgage or Invest?

    With interest rates up and markets… not, a few tips to help you decide where your money will work harder.

  • Finance for Humans

    Why the Asset Bubble Popped, All at Once

    A decade-long market frenzy came to a swift, painful end this year. We asked Philip Grant of Grant’s Interest Rate Observer — a financial newsletter that was one of the first publications to warn about the 2008 financial crisis — to explain why stocks and bonds tanked in tandem.

  • Wealthsimple

    Grow your money

    Smart investing tools and personalized advice designed to build long term wealth.

  • Finance for Humans

    Ask Lizzie: Help! I’m Planning a Wedding and I Don’t Want to Bankrupt My Friends!

    Our columnist helps the happy-couple-to-be think through how to pull off their special day without bankrupting their special friends.

  • Finance for Humans

    When to Buy (Sometimes!), When to Rent (the Other Times!), and When to Just Give Up (Please Don’t)

    The Wealthsimple guide to never letting the real estate market terrify you.

Wealthsimple

Grow your money

Smart investing tools and personalized advice designed to build long term wealth.

Get startedright arrow icon
TLDR Newsletter Logo

Sign up for our weekly non-boring newsletter about money, markets, and more. Sorry, TLDR is currently available in English only.

By providing your email, you are consenting to receive communications from Wealthsimple Media Inc. Visit our Privacy Policy for more info, or contact us at privacy@wealthsimple.com or 80 Spadina Ave., Toronto, ON.

The content on this site is produced by Wealthsimple Technologies Inc. and is for informational purposes only. The content is not intended to be investment advice or any other kind of professional advice. Before taking any action based on this content you should consult a professional. We do not endorse any third parties referenced on this site. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only. By using this website, you accept our (Terms of Use) and (Privacy Policy). Copyright 2023 Wealthsimple Technologies Inc.