3 December 2019 | pacts insight | Views:

Bonuses & Back Payments: different approaches to ‘extra’ money

This time of year is expensive. Especially for businesses awarding Christmas bonuses to their staff! But if you’re an employee receiving a little gift-wrapped lump sum, are you going to make the most of it?

‘Extra’ money is hard to take seriously. Like a £20 note you find in an old coat pocket, it’s almost impossible to not immediately spend it on a takeaway, or down the pub. But your Christmas bonus isn’t extra money - it’s taxed and part of your overall package - and you shouldn’t treat it that way.

How should you treat it? Well, follow the example of the coffee farmers we work with when they get paid a little more than normal.

Back payments: a ‘bonus’ for Colombian farmers

Coffee farmers don’t get a salary. Their income depends solely on selling coffee. But, when it’s Pact Coffee buying their crops, they don’t get something similar to a bonus - it’s called a back payment.

The back payment is the price Pact pay the farmer through the FNC, minus any logistical costs (like milling, transporting and exporting the coffee) and also minus the original ‘point of purchase’ payment the farmer gets. While we’ve worked in Colombia, we’ve paid $520,000 in back payments - a huge, huge amount for those farmers.

And because they get that additional payment at a later date, you’d think it might feel like ‘fun money’. It’s not treated as such though.

What do farmers spend their back payments on?

It generally comes down to two things: improving quality of life, or improve farm processes. Here’s some examples:

- For Jesus Antonio Apache of El Diamante farm, his first back payments were a way to make things better for his family. Paying for his daughter’s education, making home improvements, and even getting a television - all these things brought a new level of quality to his family life.

- For Faiber Vega of El Cairo farm, his back payments went straight back into the farm. A new drying bed (doubling as a roof) and processing equipment meant coffee quality shot up, resulting in even more back payments in the future!

The common thread is being future-focused when spending this ‘extra’ money. And that’s a useful lesson for all of us.

How to make the most of your bonus

Step 1. Don’t think of it as a windfall, but as part of your overall salary package

Step 2. Be sensible, but realistic. Blowing it all is not ideal, but you can factor in some frivolity - some advice suggests setting aside 80% for serious things, and 20% for fun

Step 3. Use the serious portion you save for something future-focused: paying off debt or your mortgage, adding to your retirement fund, or investment into your own skills

Step 4. Enjoy the remaining 20%, and think of it as a ‘quality of life’ boost - like a new gadget, an addition to your holiday fund, or just an amazing meal out!


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