Bonus question: How can I use my performance reward this year?
Bonus season invariably raises a few recurring questions. Should I save it? Invest it? Pay down the mortgage? Send it back home? Or simply treat myself? Find out as we explore each option.
For many of our clients, February to June is the time of year when they receive a performance bonus from their employer. When that bonus is paid out as cash – either in part, or in full – there are a few options worth considering if you want to get the most out of this hard-earned windfall.
In this article, we sum up five of the common questions asked by our clients that are worth keeping in mind if you’re expecting your own cash bonus anytime soon.
Should I save it for a rainy day?
If the pandemic has taught us anything, it’s that life can be unpredictable. Some people may therefore like the idea of sitting on cash to soften the blow of any curveball that might come their way. Having an easily-accessible ‘nest egg’ can offer a sense of stability.
The challenge is that we are in a very poor environment for cash savers. The current surge in post-lockdown inflation means that the cost of living is fast outpacing the purchasing power of cash. In the US, the headline consumer price index (CPI) rose 7% in December 2021, representing a 40-year high1.
Did you know that you have to go all the way back to 5 February 2009 to find the last time the Bank of England set a base rate above 1%? While interest rates may finally be rising in an attempt to tame this post-lockdown inflation, there is still a significant gap between cash saver rates and inflation.
Daniel Meinertzhagen from Barclays International Bank, offers some useful context: “Against this background it’s perhaps worth asking yourself how much cash you realistically need to cover a rainy day scenario. As an example, if you lost your job tomorrow, over how many months could you sustain your typical expenditure before you’d expect to find a new role? And similarly, what’s the core purpose of that cash? If you’re looking to grow your wealth over the long term, then cash deposits realistically aren’t the way forward for you.”
Should I invest?
If you think you already have enough cash on deposit and want to work it harder against the background of high inflation and low deposit rates, then investing is one option worth exploring in more detail. And if you’re already invested, have you considered topping up an existing portfolio?
The relatively volatile start to the year in financial markets has seen a frequently-asked question resurface in recent months from nervous investors: should I bide my time for a better opportunity to invest? Our view is that simply being invested, rather than trying to time the investment, is the more advantageous scenario over the long term. Even for professional investors, it is almost impossible to time an investment perfectly.
As you can see in the chart below, there are always short-term market shocks, and investments never move up (or down) in a straight line. And while history is never a guarantee of future performance, it is nonetheless recognised that long-term investors who hold their nerve during short-term shocks (rather than panicking and selling out), are likely to have a more rewarding experience.
Temptations to sell?
Source: Bloomberg, Barclays Private Bank, January 2022.
Please note: Past performance is not an indication of future performance. The value of investments, and any income can fall, as well as rise, so you could get back less than you invested. Neither capital nor income is guaranteed.
Should I contribute more to my mortgage?
Reducing or clearing debt at the earliest opportunity is generally perceived as being good practice, which perhaps explains why this question is one of the more common ones we’re asked.
That said, there are no one-size-fits-all answers in this scenario. If you’re thinking of selling any time soon, maybe you’d prefer holding on to the cash bonus to cover stamp duty and general costs associated with moving. Or would the money be better spent on home improvements to help increase your property’s value when it goes on the market? If you’re locked into a great rate in the current environment, it may be more beneficial to keep your borrowing at its current level.
Alternatively, if you’re close to a mortgage renewal date and conscious that interest rates are likely to rise in the coming months (to help tame the inflation we mentioned earlier), then reducing the value of your loan may help ease any future stretch from your mortgage costs.
Should I send it home?
Many of our clients like to send money home to support their family, and other financial commitments back in their homeland.
The flip side of this is that a number of our clients value keeping their money offshore, when there’s a perception of economic or geopolitical instability back home.
As Daniel explains, there’s also the exchange rate to consider: “At the time of writing this article (21 February 2022), the GBPEUR rate (where £1 = x EUR) is 1.20. That compares with 1.19 at the start of the year (3 January 2022), and 1.17 just 6 months ago (4 August 2021), and 1.16 a year ago (23 February 2021). Similarly, the GBPUSD rate (where £1 = x USD) is at 1.36 at the time of writing. That compares with 1.35 at the start of the year (4 January 2022), 1.39 last summer (4 August 2021), and 1.41 a year ago (23 February 2021). It’s perhaps worth asking yourself if you want to send a single lump back now, or to do it in instalments to help hedge the currency risk.”
Should I treat myself?
Who are we to say no?! Your bonus reflects your hard work, and given that we only live once, it’s important to enjoy ourselves when we can. That said, it is always worth weighing up the pleasure you’ll get from spending against affordability, and also, against your longer-term goals.
Growing and preserving wealth is a long-term activity. It’s generally not a bad idea to ask yourself these two questions regularly: what do I ultimately want to achieve with my money? And how can I best do it?