A new year is upon us and you know what that means? Bonus time! I’ve found most of my clients get their big cash infusion somewhere between January and March. In many cases, these bonuses (from the hard work you and your team have done) can lead to a significant amount of dollars.
Now that you know these funds are coming (or have been already received), the question is how do you maximize their impact? I’m going to write a three-part blog series on this topic. Part one will focus on the practical use of these dollars. Part two will be on the fulfillment or happiness use, while part three will be on the impractical use of these funds. I’d encourage you to read all three so you can formulate the appropriate plan for you and your family.
Let’s turn now to the practical use of these funds. There are many directions to go, but what are the most practical ones I tend to see and/or recommend?
1. Pay Down Debts – There are many ways one can pay down debts. You can pay off that car loan to free up money on a monthly basis. One can over pay their mortgage to help get it paid off early. Perhaps you have student loan debts (for you or your kids) and you want to make a significant dent. All of these are practical uses of paying down debt with your bonus, but the one I feel most strongly about is credit card debt. If your bonus can make a heavy impact here, I highly encourage it. Credit card debt can be crippling to your finances with interest rates in the 20% range. The sooner you can get out of this debt the better.
2. Emergency Savings – Often, life is full of surprises and many times the unexpected can eat into our emergency savings. Taking your bonus and rebuilding that emergency cushion is a great use of those dollars. It can help protect your plan and give you the breathing room many of us need. The industry recommended amount is 3-6 months of expenses in this emergency account. It’s a good time to see if your emergency savings is at a comfortable level.
3. Retirement Contribution – I may be biased here. (OK, I admit I’m definitely biased here.) But, making a big contribution to your retirement savings is a fantastic and also practical use of these bonus dollars. This doesn’t always have to take the form of a 401(k). A retirement savings account can be in a liquid brokerage account, as well. Many of us aren’t on track from a retirement standpoint and may never get there on monthly savings alone. This influx of capital may be the only way for some to get the proper level of money squirreled away for their retirement goals.
4. Big Project/Purchase – These can take many forms, but what most of them have in common is they cost big money. What do I typically see in this category? Car purchase, home purchase, or home repairs. Many of us need these bonus dollars to get these big cost items accomplished. This may be a great utilization if you find yourself torn on that next big purchase.
5. College Savings – For those of us, like myself, with children not yet in college, putting money away for their education is an impactful, but yet practical use of these funds. Knowing many of us want to pay for as much, if not all, of our children’s college, this may almost be a necessity to combat future college expenses. It certainly doesn’t help that college costs are already pushing $200,000 for four years. In most cases, the ONLY way to make some end roads here is to take chunks from each bonus and allocate it into a college fund. I’m a big fan of 529 plans as they offer the best bang for the buck in my opinion, but certainly have their limitations.
Practical is a good first step.
In the beginning of this article, I mentioned there are many uses of these bonus funds. There are also plenty of other items that I’d classify as practical, but I wanted to start with the ones I see most.
Utilizing these dollars for practical purposes may not always be the most fun, but often they are the most impactful. Next up, I’ll focus on impactful or fulfillment areas. Stay tuned and take a moment to reflect on the year you had. These bonus dollars are a reflection of last year’s accomplishments. The only question is how can you top it this year?