Before you spend your bonus or other financial windfall, take some time to consider how you might use the money so that it has a lasting impact on your life and other people’s lives. Here are a few ideas. For specific advice, please talk to your financial professional about how to use the extra cash to pursue your financial goals.
1.) Give it a chance to grow
Your bonus may be worth more to you in the future than it is now due to the power of compounding. Let’s say you invest $10,000 of your bonus. Assuming a 5% annual return, your $10,00 investment may be worth about $16,000 in 10 years, $27,000 in 20 years, and $43,000 in 30 years. So rather than spending all of your bonus now, consider investing part of it for your long-term financial goals.
2.) Save for a rainy day
Unless you already have enough cash on hand to cover a few months’ worth of living expenses, consider adding part of your bonus to your emergency fund. You’ll be glad you did if you ever lose your job or experience some other emergency that requires a large, immediate influx of cash.
3.) Pay off credit card debt
Carrying a balance from month to month on a credit card can be expensive. For example, let’s say that you put $10,000 on a card that charges 15% interest and you plan to make monthly payments of $550. At that pace, it will take you two years to pay off your debt-and you will have paid $1,579 in interest. If you are carrying a balance, consider using your bonus to pay it off (or down) so that you can avoid spending so much on interest.
4.) Pay off your student loans
If you are like many recent college graduates, you may still have a few student loans hanging around. If you do, consider using part of your bonus to make a one-time payment to your lender. Making an extra payment that reduces your loan’s principal, in addition to making your regular payments, can help you pay the loan off faster and reduce the overall interest that you will pay on it.
5.) Save for your kids’ college
If you have young children or grandchildren, consider adding part of your bonus to their college funds. To help your gift stretch further, you may want to contribute to an education savings account of plan that allows earnings to grow free from taxes while in the account and to be withdrawn free from federal tax if used for qualified education expenses.
6.) Invest in yourself
Your health and ability to earn an income may be your greatest assets. You may be able to improve on those assets by spending some of your bonus on fitness activities, learning new skills, or funding the business you’ve dreamed of starting.
7.) Donate to charity
Donating part of your bonus to charity benefits not only the charities you choose to support, it may also benefit you by providing a sense of satisfaction and perhaps a tax deduction on your federal tax return.
8.) Go green
It may be more affordable than you think. There are still federal tax credits available to help you defray part of the cost to add qualified alternative energy equipment (solar, wind, geothermal, fuel cell, biomass fuel) to your home or to purchase a new qualified plug-in vehicle. See your tax professional for details.
9.) Fund an IRA for your child
If you are in good shape financially and have a child who is earning an income (even if it’s just a summer job), consider helping your child get a head start on saving for retirement by using part of your bonus to fund his or her Roth IRA.
10.) Reward yourself
You earned that bonus! Reward yourself for your hard work by spending part of it on something fun – perhaps something from your bucket list. Enjoy!
Article published in January/February 2022 edition of Eye on Money. If you would like to be added to our mail list please email [email protected].