Let’s be honest, it’s tempting to spend a pay raise, bonus or pay increment on something that’s immediately satisfying (yes, we’re talking about that bag or vacation!). And that’s not wrong at all, because you’ve worked extra hard and deserve to treat yourself to something good. But consider putting your extra cash to better your financial future, because life is so much more about instant gratification!
Here are 5 things you can do with your pay raise or bonus this year:
1. Pay off debts
There are many reasons to pay down your loans* early, if you can. Loans apply compounding interest to the amount owed, which means the longer the loan tenure, the more you end up paying.
For example, your credit card debts grow at 24 per cent interest per annum. Assuming you owe S$5,000, and pay back S$200 a month, you would take 35 months to fully repay it. That’s a total repayment of S$7,000, for a debt of S$5,000.
Yes, credit card debt is very expensive. This is why we suggest you repay the full amount every time, and never owe anything. In addition, paying down your loans will help your Total Debt Servicing Ratio (TDSR). When it comes time to buy your flat, your loan repayments are capped at 60 per cent of your income. This includes all your loans, including the intended home loan and your car loan, credit card loans, etc. So if you pay down these other loans early, you are more likely to be able to buy the house you want.
*An exception is if you have a personal instalment loan, with fixed repayments. There may be a prepayment penalty if you try to pay off these loans early – these penalties might mitigate any savings you get. Compare the cost of prepayments to the amount you would save.