Allocating Bonus Income (excess cash)
Merry christmas and a happy new year!
As the year is coming to an end, comes the time to finalize all appraisals and start anticipating for bonuses. Hence, I think it’s timely to share about how I generally prioritize for “excess cash” or allocating bonus income. And by excess cash, I mean cash above and beyond what is needed for our daily expenses (per the budgeting).
On a daily (more like monthly, actually), I also practice a savings strategy to ensure that I allocate my cash properly into different buckets/bottles/tin cans which is highly effective for me (Post: Savings strategy for the not so disciplined).
In case you were wondering, you can also take a peek at how I allocate my monthly income (Post: How I spend my money). Bear in mind, though, that everyone’s circumstances is different so what works for me may not work for others. Adjust accordingly!
Now, let’s get started!
*Just to pre-empt, I’m coming from the point of view of a (post: middle income salaryman in Malaysia), so it may or may not be relevant to you if you’re of different circumstance
No.1 : Emergency Funds
Call it whatever you want, but this is a lifesaver fund that NO ONE should ever ignore.
I believe that we should always prioritize filling this up to our targeted amount before focusing on other stuff like “investment”. Reason? That’s because you’ll be glad you’ll have it when a wave of unpredictable predicaments hit you. The latest of such instances would be the flood that happened in Klang Valley due to the 2 days of continuous rain.
My personal story and experience can be seen in (Post: Year 2016 story about Emergency Funds). Here I detail my struggle when I was without a job nor a steady income for a year and the extent I have to go through to survive.
I cringe every time I hear someone voice out their opinions against having emergency funds for whatever their reasonings are. Emergency funds are there to help us (as the name suggests) in emergencies. It won’t be much of an emergency if we know when we need those funds, ain’t it?
Having said that, we have got to be smart about where to keep our emergency funds as well. Idle cash sitting in emergency funds should also work to generate interest lest the value dwindles badly in the face of inflation.
There are 2 angles to tackle this:
1) Immediate and liquid cash
In other words, cash that can be withdrawn instantly at any time.
Most of my emergency funds fall under this category because I want the flexibility to be able to call upon this fund immediately. Instead of keeping these in a typical savings / current account (where interest rates are abysmal), I keep them in High Interest Savings Accounts (“HISA”). HISA bears a much higher interest rate than a typical savings account but is as easily accessible.
I’ve done an analysis of various HISA sometime back (post: BEST savings accounts in Malaysia) and I personally use OCBC’s HISA for this purpose.
2) Near-liquid cash
Just in case you’re wondering, the term “liquid” used here is a finance term that refers to how easy it is to move the funds around. Typically, these funds will generate a higher return than immediate cash.
There is a portion of emergency funds that can be kept in a higher interest account, but in return it takes some time to access the funds. You guessed it right, these are your Fixed Deposits (but only if they fetch higher returns than HISA).
Another alternative is money market fund providers. It takes them anywhere from 3 – 5 business days to get your funds out. The ones I’m using are Stashaway Simple (post: Stashaway Simple Review) and Versa.
Given that it is not as liquid as savings accounts, I’d be only keeping a minimal amount of emergency funds in here as 3-5 business days can mean life or death in certain situations.
No.2 : Steady (Bom Pi Pi) Investment
Once we have settled on our emergency funds allocation (lay the foundation), then it’s time to focus on growing wealth (build a tall building).
I know that there are loads of hype now with high return investments in the market… Tesla, crypto, money game, yada yada… We’ll get there.
But first, I tend to focus on some allocation into low(er) risk investments that will steadily grow our wealth. This is because we don’t have to worry about losses (in most cases) for these investments. AND it will contribute greatly to our long term wealth through steady compounding effect.
What are some possible choices?
1) Amanah Saham Nasional Berhad’s (ASNB) fixed price funds
The famous national investment fund in Malaysia where the value of the capital invested does not fluctuate and has been paying out steady dividends in the range of 4% – 7% (FY2020 & 21 were the worst at 4%). Oh and not to mention that there are limited investment units and investors have to fight to get a hold of these units.
I’ve written an extensive article about this (Post: ASNB investment for Malaysians), so do check it out if you are seriously considering to invest in these funds.
The biggest challenge is being able to invest into the funds. Once the funds are in there, think 10x before you withdraw them.
2) Private Retirement Schemes (PRS)
PRS – Private Retirement Schemes – are an alternative to our national EPF (employees’ provident fund). Whilst not exactly “low risk”, they are controlled and regulated by the Securities Commission to be of the best interest to the investors.
My experience and returns have been pretty decent so far with AffinHwang’s PRS fund, where I dollar cost average (DCA) RM250 on a monthly basis. It has a returns of over 45% to-date. Check out my previous post on PRS funds in Malaysia for more information on this (post: PRS in Malaysia).
The most important factor of this is the RM3,000 tax relief!
3) Exchange Traded Funds (ETF) / Robo-advisors
Whilst not exactly the same thing, I’ll group these into the same category.
Exchange traded funds (ETFs) are funds that track selected indices. As the old mantra says, for the regular investors, it might be easier to passively DCA into ETFs as they will go up in the long term. This is also one of the few investments that I use DCA on (post: Dollar Cost Averaging or not?)
I don’t necessarily buy into ETFs (post: ETFs and is it worth your money?), but I invest into them through robo-advisors.
I do invest into robo-advisors regularly. The 2 I invest in are Stashaway and MyTheo. The reason it’s in the same category with ETFs is because most (if not all) robo-advisors invest into ETFs. Hence, essentially, I don’t need to pick my ETFs and allow robo-advisors to do so for me. This allows me to DCA at a low amount, whilst getting the diversification of various ETFs.
It is important to note that ETFs can also be high risk investment and there are issues that we need to be aware of, but for the general public, ETFs may be a safer bet than stock picking.
4) Dividend Investing
Treading on to gray area for the next 2 points.
There is an option to invest into dividend paying stocks. The focus here will be income generation via dividends and hence the criteria for investing are more stable / established businesses with good dividend track records. I’m a big fan of dividend investing, especially in the US equities market (post: Dividend growth investing).
This includes investing in Real Estate Investment Trusts (REITs), as well, as they provide good dividend income based on the rental income of the properties they hold.
The rationale is simple. Whilst investing in good and stable companies, which will see year on year growth, we are also awarded a steady income via dividends yearly. Any capital gains will be a bonus. However, this is not an important criteria as I’m invested in these stocks for the long term.
You may check out the basic overview of dividend investing in my previous post as well (post: Looking out at dividend investing).
5) Crypto Rewards with Stablecoins
Last thing I want to share, there is the option of earning rewards by holding Stablecoins.
Cryptocurrencies have been trending a lot of late and is therefore worth learning about it (post: Understanding cryptocurrencies in layman terms).
Stablecoins are basically cryptocurrencies that are pegged to a certain real world currency (in most cases, USD). Yes, it’s “stable” and does not have the volatility that comes with your typical cryptocurrencies.
Once we got a hold of Stablecoins, we can then earn rewards through various different kind of platforms such as Celsius Network (post: Celsius Network Review), Nexo, FTX Earn, Blockfi, YouHODLer, etc.
What’s the rate we can earn? As of writing, my Stablecoins in Celsius Network is earning 8.5% APY (annual percentage yield).
Do take note that we’re still dabbling in Crypto space (even though different Stablecoins have their own risks) and none of these are guaranteed so it depends on how comfortable we are with Crypto.
No.3 : High Risk, High Return Investment
AKA Play money. This next category refers to investments that may be able to generate above average returns for us in order to accelerate the growth of our wealth.
There are countless options / choices that falls under this category. I’ll share a few that I was/am personally invested in:
- Equities (Post: Malaysia vs US stock market, Options trading, Wheel Options income generation strategy, Investment tools I use)
- Real estate (not something that I prefer – Post: Equity vs Property Investment)
- Gold, silver, and other commodities
- Crowdfunding – P2P, Equity Crowdfunding (Post: ECF in Malaysia)
- Cryptocurrencies & Non-Fungible Tokens (NFTs)
- Private equity, venture capital, angel investing
- Other non-conventional options that I may or may not know
As with all investments, it is important to DYOR (do your own research) and make sure we are comfortable before jumping into it. Do not be a FOMO-vestor and invest just because it’s a trending thing (post: Allure of a FOMO-vestor).
And of course, beware of any scams that is lurking out there (post: How to spot scams and other shenanigans).
Closing Thoughts
There is also an important part of the excess cash that we should not ignore… And that is to reward ourselves with a little something. Yes, I mean spending some of the well-earned money to get ourselves something.
This may not be relevant to those pursuing the FIRE movement, of which I don’t subscribe to as shared in another post, but I believe that rewarding ourselves on the way to financial freedom keeps our sanity intact.
How we allocate our excess cash between the 3 (+1) category depends on each individual’s circumstances and comfort level. Bear in mind that we are all different (post: Running our own race) and what one’s peers do does not mean that one must be following the same path.
As for my upcoming bonus, a big chunk will go to my house renovation fund as I recently got a new house (post: Home hunting journey – Subsale) and I’ve depleted my Emergency Funds! I’d still allocate about 20% for category 2 & 3, though.
How will you be allocating yours?
