Should I Factor My Bonus Into My Budget?
Many companies will push the fact that they offer quarterly or annual bonuses when you are negotiating your salary to convince you to take the job.
This isn’t a bad setup; you just need to plan your budget accordingly. You may even decide that the additional bonuses combined with the salary or the job itself is worth taking on this pay structure. If you do this, it is important to create your budget without using your bonus as part of your annual budget.
Bonuses Are Not Guaranteed Income
If you are counting on a bonus as part of your annual salary, you need to remember that bonuses are not guaranteed. A company can stop issuing bonuses at any time. They may cut back because the company is not doing very well that quarter, and they want to cut bonuses rather than letting people go.
They may also decide that you did not meet the performance expectations for your bonus. Your bonus is not entirely under your control, and so you should avoid relying on it as a regular part of your income.
Focus Bonuses on Your Goals
Instead of factoring your bonus into your annual salary, consider using it to help reach your financial goals, such as paying off debt or funding your emergency fund. But you should also be working towards these goals separately as part of your monthly budget. If you rely only on your bonuses to reach these goals, you may not make any real progress on them during slow economic times, which can be very frustrating.
However, a bonus can be a great way to jumpstart a long-term financial goal. Another plus? You don’t have to cut back on your monthly budget to do so. In short, bonuses can be a great way to reach your financial goals more quickly.
Use Your Bonuses for Optional Extras
You can use your bonus to fund your luxury items, with the understanding that you will not purchase certain items or go on vacation unless you receive your bonus. This also means that you should not spend this money until you actually receive it.
For example, you may decide to use your bonus each year to cover your family vacation with the understanding that you will not go on vacation if you do not receive the bonus. This way your vacation will not ruin your budget. You may also use the bonus towards annual swim passes for your family or passes towards an amusement park. However, you simply do not renew the passes if you do not receive your bonus.
It’s also a good idea to use this strategy with items that renew annually rather than monthly, so you don’t have this coming out of your regular budget each month.
Make a Plan for Your Commission
If you are working on a commission-based salary, you should handle this differently than you would a true bonus. You would need to set up a budget for a commission, and then budget by setting aside money on your good months to cover your slow months. This is a different process from how you should handle your bonus.
Just as it’s important to create a plan for how you spend your bonus, it’s also important to create a commission-based budget. That way, you don’t blow your budget on slower months.
Create a Budget for Each Bonus
If you do not create a plan for spending your bonus, you may end up spending more than you received in your bonus. Handle spending your bonus similar to budgeting for a windfall. This means that you divide up the money between your financial goals and allocate accordingly, being careful not to overspend.
If you are out of debt, own a home and have reached many of your financial goals, then you may use the majority of it on fun spending. However, it is always a good idea to save or invest at least a portion.
Do Not Depend on Your Bonuses
Last, and most importantly, be aware that your bonus is not guaranteed income. Your company may slowly phase out bonuses or reduce them over time. Some companies offer a bonus based on how well the business does overall, and this means that some years it will be huge and other years it may be small or even nothing.
It’s wise to omit bonuses from your monthly and annual budgets, or when determining other major spends, like how much you can afford to borrow for your mortgage or if you can afford to take on another car loan.
In short, if you are relying on your bonus to make your budget work, you are overspending and need to readjust your budget or find a job with a more traditional, salary-based pay structure. This will protect your finances in the future.
Updated by Rachel Morgan Cautero.