You can start collecting your CPP and OAS benefits in your early 60s. But is it better to hold off for another few years? Here’s what to keep in mind before you tap into these pensions.
December 21, 2022
7 ways to make the most of your year-end bonus
By Andreea Perescu and Nancy Carr
Looking forward to a year-end bonus? Here are some tips on how to plan and save to make the most of your finances.
Dreaming of traveling after years of pandemic restrictions? Or maybe you're eyeing a kitchen remodel or newer car? Some simple financial planning will help you make full use of your bonus.
1. Don’t count your chickens before they hatch
A year-end bonus is exciting, but wait until it’s in your account before you spend it. Talk of a possible recession and high inflation might be changing the economic outlook for employers. So keep in mind that things can change. Think about taking a planned approach to avoid any unneeded debt.
2. Consider income tax
Income-tax deductions affect the amount that you’ll receive. For example, a bonus that is larger than your regular paycheque may be taxed at a higher rate. In better news: you might get some of it back after filing your taxes in the spring.
3. Create a plan and stick to it
Once you know exactly how much you’ve received, you can start planning. A careful plan can help you make the best use of your bonus money.
“Treating it as a windfall and blowing it on whatever you want is a mistake,” says Mike Holman, the Toronto-based writer of the Money Smarts Blog. “It’s an easy thing to do, because it’s a separate, special paycheque. It doesn’t sound like a lot of fun. But for a lot of people, taking just 10 to 20% for fun money and putting the rest toward something responsible is best.”
Nancy Zimmerman, a Yellowknife-based money coach and blogger, agrees. “First and foremost, I want people to have financial goals for themselves,” says Zimmerman. “When the bonus comes, they can use it to give themselves a boost on their goals.”
4. Top up your registered retirement savings plan (RRSP)
Most Canadians with an RRSP have extra contribution room. Directing some of your bonus toward your RRSP is a great decision. It might even mean a higher tax refund next spring. Some workplaces can adjust taxes on your bonus if you invest it in your RRSP. That means you'll keep more of your dollars right away instead of waiting for your tax return in the spring. Check with your employer to see if they offer this option.
5. Add to a tax-free savings account (TFSA)
Unsure how much you can contribute to your TFSA this year? Check with the Canada Revenue Agency to see how much you can invest per year in a TFSA. A TFSA allows for your initial investment and all gains to grow tax-free.
6. Pay down your mortgage
Are rising interest rates making you rethink how quickly you are paying down your mortgage? Check to see how much and how often you can make lump-sum payments towards your mortgage. Just one extra payment a year can really lower your interest payments over the life of your mortgage.
7. Pay off debt
Lowering any extra debt is always a good idea.
Remember you don’t have to direct your entire bonus to one area. You can divide it up and plan to use a certain percentage towards each of your financial goals. Holding onto a certain amount for “fun money” can be a good idea, too.
Building saving for fun items into your budget can help you stay on course. “The key message from me as a money coach is to use your bonus in a way that you feel good about,” says Zimmerman. “Do something that makes you excited about your financial life.”
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
