How I spent my Christmas bonus / Fixed-Income Securities Corporate Bonds

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Infinity pools at Crimson Resort and Spa, Mactan, Cebu

It’s the season to be merry as working folks start receiving bonuses. I once had an officemate who lists down days and amounts and schedules her spending accordingly. I mainly enjoy being surprised.

 

Discretionary bonuses not a matter of right

Other than the mandatory 13th month* bonus required by law to be paid to employees, resist the urge to expect your year-end bonuses as a matter of course. You may become disappointed and overshoot your budget. Company profits rise and fall with varying degrees every year so discretionary bonuses that a company is able to pay may vary.

Discretionary bonuses are not demandable as a matter of right so by spending according to your expected amount of bonuses, you run the risk of unduly inflating your lifestyle and risk defaulting on your obligations as the amount you actually receive come bonus time may be less than expected. It is even worse when you charge these excessive expenses on your credit card and then later become unable to pay them off in full at the end of the month when your bonus ends up not being up to par!

When you don’t keep track of the bonus payout schedules, it will always be a nice surprise to see an unusual amount enter your payroll account. The bonus will rightly feel a novelty, something to mindfully spend instead of just take for granted.

 

Fixed-Income Securities

I spent majority of my bonus (80%) on fixed-income securities, namely: a short-term time deposit certificate (CDs) and a corporate bond (bond). They are so called fixed-income securities as they pay out fixed income in the form of interest for CDs and coupon for bonds. The frequency of the payouts vary and may be monthly or quarterly. These securities are generally safer than equities (stocks,** credit derivatives, futures, etc.)

CDs and bonds are different from the ordinary bank deposit as they pay more interest. In particular, interest rates on CDs vary according to their tenor. My 30-day CD pays 2% interest p.a. less 20% witholding tax. My five-year CD, on the other hand, pays 4.25% interest which is tax free as it is long term. My two-year bond pays 7.06% p.a. less 20% tax.

As for the risk, CDs are generally safer than corporate bonds. CDs are essentially still bank deposits which are insured with the Philippine Deposit Insurance Corporation (PDIC). Corporate bonds, on the other hand, rely on the financial health of the issuer corporation. If such company dives during the life of your bond, the company may default or skip out on paying you back on your bond.

Compared with the government retail treasury bonds which I wrote about here, those are safer than corporate bonds.

As stock prices plummet, fixed-income securities are becoming more attractive as they provide that periodic passive income which is always useful, in case of job loss or other event which may cause you to lose your active income.

 

Stock prices plummet
I am still allocating money out of the usual salary to buy shares of stocks every month. I have reduced this monthly allocation though as stock movement does not look good in the short to medium term. I am currently running a six-figure paper loss on my shares. Haha. How about you?

This exposure isn’t enough to make me nervous yet but I do plan to rebalance my asset allocation soon. On the other hand, I do hesitate reducing my shares allocation as in theory, stock market gains will be useful in retirement. I still have a 30-year investment horizon anyway–plenty of time to wait for the market to recover.

Travel security

Lastly, I spent a minor portion of my bonus on a car dash camera. I’ve heard several horror stories of erring drivers running from the scene or other traffic close calls where a dashcam could have provided much-needed evidence especially for traffic police.

Driving in Cebu City, Philippines is generally safe as most cebuanos are very courteous. But worsening traffic and christmas-time scammers may require a higher level of vigilance on your part to secure yourself and your family.

How did you spend your bonus?
George
*1/12 of your annual basic salary.
**The Philippine equities market is relatively small in that there is only one exchange (the Philippine Stock Exchange located in Manila)*** and only consists of stocks as the trading of futures is expressly prohibited by our Securities Regulation Code. Our companies and market have yet to come up wit credit derivative securities.
***Compare this with other countries such as nearby China, which has two exchanges: the Shanghai and Shenzhen Stock Exchanges.


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