I love writing this blog each year. This is fun as I walk you through internal discussions I have personally, discussions I have with my financial planner (Kyle & Dave), and hundreds of client conversations that are about to ensue. The question du jour is what to do with your recent or upcoming bonus dollars?
Now, most people seem to get their bonus dollars either right at year-end or sometime in the first quarter (commonly Feb or March). This is a great opportunity to plan for the future, make up for the past, or better your financial position overall. However, you plan to handle these dollars it generally behooves you to come up with a plan, or strategy, for how you deploy them.
Let’s take a look at the different ideas and how I’ve seen them play out in real-life situations.
What Should I Do With My Bonus?
Make up for past indiscretions.
Look it happens that occasionally we get in less than desirable financial situations. Sometimes it is a lack of judgment, other times it is situations we otherwise couldn’t avoid. Regardless, of how we got here, the reality is your bonus dollars can afford you a “get out of jail free card”. And yes, growing up next to Atlantic City, Monopoly was a household staple. There is nothing sweeter than when a client comes in and we are discussing a bonus that has the potential to righten the ship. They pay off bad debts or free up cash flow that has been an albatross around their neck. The point is if you find yourself in this situation, and are looking at a bonus that can help get you on solid ground today, take it!
Plan for the next year.
I absolutely love doing this, personally and giving advice on it professionally. You see I look at my non-retirement investment account as additional retirement savings. This is why when I get my bonus I instantly think through my big expenses for the year (generally ones I can’t cover through normal cash flow). Then I start to loosely estimate what those large expenses will be. For instance, this year my list includes camp for my kids this summer, family vacation, and some house projects we have on the docket. These aren’t uber expensive necessarily, but pricey enough that my bi-weekly income won’t cut it. So, what do I do? I have a sinking fund where I deposit these dollars for the upcoming year ahead. It is such a relief for me and a position I (along with many of our clients) am lucky to be in.
Improve your overall finances.
Although one could say the other types of two bonus spending improve your overall finances too, I look at this one differently. This one generally comes after the other two. At first, you have to rid yourself of a bad situation. Then, you have to make sure you are prepared for the immediate future (hence planning for the next year). Finally, once those two things are accomplished, we get to utilize these bonus funds to simply better your overall situation. Does that mean investing more into your investment/retirement accounts? Paying off your mortgage? Putting extra money for your children’s college? The choice is yours, although I certainly recommend connecting with a financial planner first, to determine how best to allocate these funds. For instance, this past year I was able to put my next year’s big expenses away and top off my investment account. It is a great feeling as I know I am putting myself ahead of the game, and protecting myself at the same time.
There is both an art form and a science to this stuff. In the end working with someone, like even I do, to help formulate your thoughts is extremely beneficial. It is so critical for me to bounce ideas off my colleagues as they know me personally, and what I am trying to accomplish. This goes an enormous way in making sure I make sound financial decisions. This stuff can get very personal and emotional for us all, that is why I love the idea of working with someone who can see things clearly and unemotionally.
So what will you do with your bonus dollars?
As always stay wealthy, healthy, and happy.
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