So you finally went and landed that new job or promotion you’ve been after. Give yourself a pat on the back. But have you thought about what you’ll do with the extra money you’ll be earning? It’s human nature to quickly grow accustomed to what we’ve got, so if you don’t make a plan for your sudden windfall, you’ll find yourself frittering it away on inconsequential items. Here are a few better options for making use of your bonus bucks.
Deal with debt
First and foremost in any financial plan is to reduce and ultimately eliminate any high-interest debt. If you have multiple debts, start by paying off the one that’s charging you the highest interest. Since most retailer credit cards charge in the neighbourhood of 30 percent annual interest, that’s where you should look first. Then, take care of car loans, student loans, and anything else hanging over your head. Or, better yet, use your new income status to establish a line of credit (LOC) to consolidate debt and minimize interest payments for those times when your cash flow falls short. If you have some collateral like a house, you should be able to get a secured LOC at less than 5 percent interest based on current rates
Pay down your mortgage
Most mortgages enable you to make overpayments each year, typically up to 20 percent of the principal. And, unlike your regular payments that are split between paying interest and principal, any overpayments go entirely towards the principal. Adding just a few extra dollars to each of your monthly or bi-weekly payments can shave years off the life of the mortgage.
Educate the kids
Education is the key a successful future, but it can be very expensive getting one. Registered Education Savings Plans (RESPs) are a great way to save for your kid’s future tuition. Any earnings are tax sheltered until the funds are withdrawn and, as an added bonus, the federal government kicks in extra funds through the Canada Education Savings Grant and Canada Learning Bond programs (amounts and eligibility vary based on family income), and residents of Alberta get an additional $800 through the province’s Centennial Education Savings Plan. (Visit www.canlearn.ca for full RESP program details.)
Boost your retirement plan
You think things are expensive now? Imagine how much gas or a cup of gourmet coffee will go for in 20 or 40 years’ time when you’re finally ready to retire. (Actually, don’t. It’s too depressing.) But do consider how much money you’ll need to live a comfortable and enjoyable life when you’re retired. Rather than waiting until the annual rush at RSP deadline time, it’s easy to set up small, regularly recurring installment payments. Another option is Tax-Free Savings Accounts (TFSA). While they’re set up similar to an RSP – you go into your financial institution and select from a catalogue of options – the tax savings is very different. Instead of getting a deduction on your income for this year, any profit the investments make is not taxable. Think of it as future free gas money for all those road trips down to Florida.
You’ve worked hard, so you deserve a reward. But if you’re not confident in your ability to keep your hands off your cash, set up automatic withdrawals after every payday to go to a separate savings account. Then, don’t touch it until you’ve got enough in there to go on that dream vacation or buy the 80-inch plasma screen TV you just gotta have.
Writer for RateSupermarket.ca