10 Things to do with a Bonus or Other Windfall

1. Invest it. A bonus or other windfall has the potential to make a lasting impact on your life if you use it to help reach your financial goals. Remember, even modest amounts that you invest today have the potential to grow into sizable amounts over time. For example, a $10,000 investment that earns 6% annually will be worth about $18,000 in 10 years, $33,000 in 20 years, and $60,000 in 30 years, due to the power of compounding. (This is a hypothetical examples for illustrative purposes only. Your results will vary.)

2. Contribute to an IRA. Stash your influx of cash in an IRA for your retirement. And if you have a non-working spouse, stash some of it in a spousal IRA also. You have until the due date of your 2017 federal tax return (not including extensions) to contribute for 2017. Consider contributing for 2018 while you're at it.

3. Fund an education savings account. If you have young children or grandchildren, consider allocating part of your bonus to their college funds. Tax-favored education savings accounts and plans that allow tax-free earnings and withdrawals may help your gift stretch further.

4. Re-balance your portfolio. Has your mix of stocks, bonds, and cash strayed from your target asset allocation? If so, consider using your bonus to buy investments in the under-weighted areas. Sure, you could just sell some of the over-weighted asset class, but this way there is no tax cost to you. Asset allocation does not ensure a profit or protect against loss in declining markets.

5. Pay off credit card debt. Are you carrying balances on your credit cards? Pay them off! The high interest rates charged by credit card companies can take a big bite out of your income, preventing you from saving for your financial goals. Consider paying off the card with the highest rate first.

6. Pump up your emergency fund. You will be glad you did if your car breaks down, the furnace dies, you lose your job, or any other unexpected, expensive event occurs. Generally, an emergency fund should contain an amount equal to several months' worth of expenses. And it is generally a good idea to keep an emergency fund where it can earn interest and be easily liquidated if needed.

7. Invest in yourself. Your health and your ability to earn an income may be your greatest assets. Consider improving the return on those assets by spending some of your windfall on participating in fitness activities, learning a new skill, or funding that business you have dreamed of starting.

8. Help a loved one. You can give any number of people up to a certain amount per year (varies from year to year) without your gifts being subject to the federal gift tax or reducing the amount that can be exempted from the federal estate tax later on.

9. Give to charity. A gift to charity can provide a great sense of satisfaction - and a tax deduction if you itemize deductions on your federal tax return.

10. Do something on your bucket list. If your savings are on track and your expenses are under control, use the extra cash for something that you've always wanted to do.

Do you have questions or need additional assistance with your personal finances? Copper Leaf Financial is a fee-only, fiduciary firm and we can help you by providing advice on planning for your family’s future. We develop a customized wealth management (financial) plan designed to integrate every aspect of your financial life. This is "true wealth management" - a holistic, all-encompassing approach that goes beyond just investment advice. Call us today at (802) 878-2731 to schedule a strategy session and begin building your road map to financial success.

Article published in January 2017 edition of Eye on Money.