INGRID MACINTOSH

VP, WEALTH, TD ASSET MANAGEMENT

A: Well, I could tell you what to do with your bonus, but it might be easier if we skip ahead 30 years to show you the potential results of your smart moves. That’s because, while we never know what’s in store for us, we’re actually pretty confident what happens to money over time if it’s saved and invested: It tends to grow.

So let’s run through some typical purchases you can make with your bonus: buying some cool boots or splurging on a Cancún vacation. Let’s also look at some typical financial moves too, such as investing the bonus or using it to pay down your mortgage. But first let’s talk about a concept called the “future value of money,” something many of us have a hard time imagining.

It goes like this: There’s the money in your pocket and then there’s the future value of the money in your pocket. If you have $50 in your pocket and you use it to buy necessities like groceries, the future value of your money is, umm, zero — but at least you’re well-fed. The future value of that $50 if you invest it, however, changes: One day you may have $50.25 in your pocket, later it may be worth $63.

That magic comes courtesy of the 8th Wonder of the World — compound interest. All jokes aside, let’s take a look at the potential “future value” of some other choices you could make with your bonus:

illustrations of new boots, vacation photos, and piggy bank

New designer boots

You probably got three-years wear out of those expensive designer boots, then they sat in the closet for seven years and then they got purged. What’s their future value after 30 years? What’s more, we often may feel a bit of buyer’s remorse when we get excited about buying something. We bring it home and the anticipated happiness may not materialize. (We lose the future value of our money and maybe we’re unhappy too. Ugh.)

Trip to Cancún

Same with a trip to Cancún. You might have great memories and some pics after 30 years but if you spend your bonus on trips every year, memories and pictures might be all that you have when you hit 65. Don’t get me wrong: There’s value in treating ourselves and enjoying the fruits of our hard work, and when you see that bonus cheque, you might be awfully tempted to do just that. But if you fail to take care of your future self in place of serving the whims of your present self, the years to come might be cloudy.

Invest in a registered or non-registered account

Now let’s say you maximized your Registered Savings Plan (RSP) with your bonus and then put any leftover funds into a Tax-Free Savings Account (TFSA), or if that’s also maximized, a non-registered investment account. If you think you’re elated with your $5,000 bonus now, once we fast-forward 30 years, you may be overwhelmed. That’s because if, for example, you let it grow in an RSP over time, the return on your invested bonus may be now more than $25,000 — this example includes investing the tax return benefit you get.1 If you consider investing all your bonuses this way and you might be in the position to reach some big-time retirement goals, whether it’s to retire early, travel the world, buy a cottage by the lake or whatever.

Pay down your debt

Alternatively, you could use your bonus to knock down some debt, for example, your mortgage. If you consider making an extra payment annually, it could cut years and dollars off the overall mortgage. That’s the future value of money in action. How will you feel once the mortgage is paid off? What will you do with that extra money every month?

Now, if you are dealing with high-interest debt, like credit card debt, yes it may make more sense to use the bonus to pay off that first. Same if you have trouble with day-to-day expenses or any emergency repairs on your home. But if that’s the case, perhaps you should see what your overall cash flow is and where your money is going every month.

When confronted with a bonus, a tax refund or any windfall, we’re all tempted to reward ourselves but we shouldn’t overdo it. Don’t forget that all important person living 30 years in the future — you, the one who’s living on their savings. The future value of your bonus can go a long way to reward your future self for all your hard work and smart planning. Financial security — now that’s the best bonus of all.

Ingrid Macintosh has spent her three-decade career working on all sides of the investment industry, institutions, advisors and investor alike. Her last MoneyTalk article is, What should I do if there’s a recession?