KUALA LUMPUR: When Anna Lim received her first five-figure bonus, she invested it in a prime commercial property. The 40-year-old, who holds a senior management position in a financial institution, says she opted for the commercial property for its potential for capital appreciation and a healthy rental yield.

Lim, who owns her own home, plans to use future bonuses to invest in a residential property. “I don’t have the time to go on expensive holidays, so I use my bonus to invest in property,” she explains.

For 39-year-old Lisa Gomez, her year-end bonuses go towards savings and investing in unit trusts. “I also set aside about 25% to indulge in a holiday,” she adds.

Although it was recently reported that annual bonuses are diminishing, even at the average 2.13 months forecast for executives in 2012 by the Malaysian Employers Federation in its 2011 MEF Salary Survey for Executives and Non-Executives, bonuses are among the perks that employees look forward to.

Many see it as a financial-planning opportunity — to invest or set aside for a rainy day — while others spend it on holidays or splurge on shopping.

If you have a large sum of money coming your way and you’re unsure about how to put it to good use, the first step would be to come up with a financial plan. You can do this on your own or with the help of a financial adviser or a fee-only financial planner who does not sell investment products. As part of the plan, analyse what you’ve done for yourself, says IPP Wealth Planners Sdn Bhd senior partner C T Lim. Take stock of your savings, investments and debts, and check them against your risk profile, he adds. Having done so, you should then measure your current net worth against your timeline for achieving financial independence.

“Then, identify the shortfall or excess. With that, you will automatically, mathematically, emotionally and logically, know what to do,” he says.
Here are some things you can do with the spare cash.

Settle debts

Those who have consumption debts — particular credit card debts, overdrafts or personal loans — should think about settling or reducing them, says Lawrence Tan, a licensed financial planner with Standard Financial Planner Sdn Bhd. “As long as these debts are not reduced or settled, it is utterly wrong to look at investments because there might come a day when you might have to withdraw the investments to repay these debts,” he adds.

Create an emergency fund

If you do not have any consumption debts, or you have extra cash after paying off debts, use it to augment your emergency fund. Ideally, your emergency fund should cover about six months’ living expenses. If you’ve not started an emergency fund, then use the spare cash from your bonus to do so before you consider investments or splurging on a holiday.

Be sure to put the cash in an account that is separate from your current or savings account. While you want the emergency fund to be accessible (so that you can dip into it if you have an unexpected loss of income or an unexpected expense), you also do not want to use it for day-to-day expenses. A fixed deposit is a good option, but rather than placing the entire six months’ worth of living expenses into a 12-month fixed deposit, open several accounts on a revolving maturity schedule. That way, if you need cash in a hurry, you won’t need to pay too high a penalty for redeeming a fixed deposit before its maturity date.

Settle your housing loan

If you have no consumption debts and have a healthy emergency fund, consider settling your housing loan. “If your housing loan is ending in the next two to three years and your bonus is enough to fully settle the loan, it is advisable to pay up the loan,” says Tan, adding that you can then use the instalment funds to invest on regular basis. When settling your housing loan earlier, be sure to check whether there are penalty charges.

However, if the bonus is not sufficient to settle the entire loan, consider shrinking it. Depending on how much spare cash you have, you can opt to make an advance payment on the monthly instalments, or you could go for capital repayment, which reduces the capital portion of the loan.

Invest

You have a few choices — equities, unit trusts or property. Consider equities if you are well versed with particular stocks or industries, says Tan. You would need to know the stocks’ price-earnings ratio, consistency of dividend payment, dividend yield, net profit trend, and so on, he adds. If you are not well versed, then a safer bet would be unit trusts. Even so, Tan cautions, it is important to choose a proper fund manager, and to not be swayed by the branding of a particular fund or a friend’s recommendation.

If you are already invested in equities or unit trusts and you do not own your own home, consider using your bonus as a down payment for one. If you already own a home, consider buying a second property that will give you rental income or capital appreciation. Factors to consider include the property’s location and features and the developer’s track record.

Using bonus money to invest in the property market isn’t a novel idea: In the UK, although the 2008 financial crisis reduced demand for properties due to job losses and reduced bonuses, interest in property appears to have returned. Last July, the Financial Times reported that employees in the financial and business services sector had started spending their cash bonuses on upmarket properties in London, as confidence about their future bonus stream grew.

Pay the taxman

A bonus could put you into a higher tax bracket. If your company doesn’t withhold the taxes on your bonus, or you find yourself in a higher tax bracket, set aside the money owing the Inland Revenue Board in a savings account or short-term fixed deposit until you file your tax returns.

Spend or give

If you don’t have any consumption debts and your investments are in place, there is no harm in spending some of the bonus on yourself. You could set aside 10% to 15% of the money on something fun — be it a nice dinner with the family, an iPad or even a holiday. You could also give a small portion to help the needy, such as soup kitchens, homeless shelters or any other cause that is meaningful to you.