The 13th Month Dilemma
It's the Christmas holidays and, indeed, 'tis the season to be jolly. This is the month we'll get our mandatory 13th month bonus. An entire month's pay for doing nothing! What a great concept!
So what's the dilemma in that? For most of us, nothing. We don't think twice about spending everything for shopping. It's Christmas, for crying out loud! We need the extra dough to buy gifts. Who's going to pay for all the useless knick-knacks you'll exchange with your officemates? Who's paying for your kid's trip to Toy Kingdom? Who's paying for your trip to Toy Kingdom? Where will you get the money to buy your husband a new pair of socks? How will you pay for your weekend trip to Bangkok? Isn't that what your 13th month bonus for?
Well, in a word, yes. But I have something to tell you that will spoil your fun (and mine). There are other, better ways to use your 13th month bonus on. For that matter, it's not just that. It's the other automatic bonuses you may have received just for showing up. It's the money you may have received from your parents (which I like to call "pity money"). It's the 100-peso bill you found in the street. Money for nothing. Free money. Found money. Manna from heaven. Whatever you call it.
So, what do you do with extra cash that you have but did not earn? Okay, let me get back to the topic. What do you do with your 13th month cash bonanza? Let me count the ways (and compute your financial returns).
Spend it. The obvious and common option. Why use your hard-earned savings on buying gifts when you can fund them with your 13th month pay? It makes sense, right? It does, really, when the other options are to use up your savings originally set aside for a more important financial goal or to rack up more debt with your credit card.
But this reflects poor financial planning in the first place. Irregular, once-or-twice-a-year expenses like Christmas gifts should be planned ahead, and saved for. I know, it's easier said than done. But it's these occasional but expensive expenses that take a hit on our budget and our financial plans.
Return: 0%
Save it for now. I'm talking about delayed gratification. You'll still spend the money, but not now. Maybe you're thinking of buying a new digital camera. Instead of charging it to your card and pay part of it when your bill comes due and pay the rest say a month later (at a monthly interest rate of 3.5%), why not set it aside, save the balance of the cost of the camera, and buy it when you can pay off the whole thing in cash (or time in during a sale). Sure, all you did was save a little on credit card interest. But congratulations! You're starting to form a good financial habit - waiting.
Return: 3.5%
Invest it. Talk about waiting. This time, you don't even spend your bonus until, well, years or even decades from now. What if you place your 13th month pay of, say P25,000, to a mutual fund, treasury bond, or other similar investment that returns an average of 10% net a year. In five years, your bonus has grown to P40,000; in ten years, P65,000; in twenty years, almost P170,000. All just by sitting on your butt. That's a 579% jump, or an effective rate of 29% a year. That's the power of compounding: you earn interest on your interest.
Return: 29%
Pay down debt. Okay, it only gets worse. What if I tell you that you can earn 42% in a year, but you won't receive a single centavo? How is that possible? If you carry credit card debt for a year, you're paying 42% a year or 3.5% a month. And that's conservative. Some credit card companies charge interest on your interest, reverse compounding so to speak.
Paying off your debt, or even part of it, saves you a lot more. You won't get anything tangible in return but you can gain back greater control over your financial life.
Return: 42%
Donate it. Finally, you can give it away, to your church, a charity, or a family in need of help. If you think you won't get anything in return, think again. Many generous people testify to the fact that they get back what they've given a thousandfold. Maybe you'll get it back financially, maybe not. But the very act of sharing and helping others is, well, priceless.
Return: 1,000%
