If you’re lucky enough to work somewhere that offers bonuses, you know they can be a double-edged sword. While getting a lump-sum boost in your check is always a welcomed site, taxes on bonuses are higher than your regular income. Plus companies that offer bonuses consistently use it as a measure of your overall compensation, so instead of being “extra income” it just becomes a total part of the salary package they offer you. So instead of offering you $70,000 a year they offer you $60,000 and say they’ve had a yearly performance bonus of 15% or so for the past 10 years. It’s not all doom and gloom however. For those that have trouble saving, bonuses can be a great opportunity to make you save. People are more likely to save a large lump sum of money than a little bit of money spread out over a long period of time. So what should you do with your bonus when it comes this year? Here are 7 smart places to put that extra cash.
1 - In the bank
If you haven’t set up your emergency savings yet, then stop right here. A bonus is a great opportunity to catch up on your savings in one big swoop that can instantly get you back on your financial track. Depending on the stability of your income, you may want anywhere from 3 to 12 months of savings tucked away. Having that cushion gives you freedom to pursue other financial interests as well as mitigate any possibility of losing a piece of (or even your primary) income.
2 - Paying off your debts
If you have outstanding credit card or other high interest debt, a bonus can help you break away from those monthly payments and growing interest. Make sure to analyze your debt and see which makes the most sense to attack first. Paying down some of your current debts will allow you to free up a little more of your monthly income that you’ll be able to put towards your other financial interests.
3 - Down payment on a house
Saving for a house can be hard, especially if you don’t already have a lot of wiggle room in your budget. A bonus can give you the needed cash to put down on a home (whether primary or investment property) sooner than you would if you had to save it month to month.
4 - Put it to your retirement
As much as we try to save for our retirement, you can always do more. With inflation rising and quality retirement plans not being able to keep up, it’s more important than ever to ensure that we have enough when we’re ready to stop working. That being said, anytime we have an extra amount of money coming our way tucking it away for retirement is always a smart move. If you’re eligible for a Roth IRA and haven’t reached your contribution limits for the year, that is as good of place as any to put your money. If you can’t contribute to a Roth, putting it into a different retirement medium is a solid choice as well.
5 - Invest it
If you’re not interested in tying your money up in a retirement medium, you can also invest it with a traditional brokerage or mutual fund account. Having a solid investment portfolio is a crucial part to diversifying your assets and building your wealth. If you do decide to invest, make sure you get the correct guidance that you need to make smart decisions with your money.
6 - Pay for tuition
If you don’t want to invest in the market, you could always invest in yourself! One of the ways we can make more money is to build our credentials to allow us to command higher salaries and compensation in our work. Being able to boost our income potential is crucial to reducing our debt and building our wealth, and while there may be some debate as to the importance of degrees and success, it definitely can’t hurt.
7 - Funding a business endeavor
Have you ever thought a business opportunity would be a great investment but didn’t have the cash to put up? Missing out because you don’t have the excessive cash is why some people never get to that next plateau with their finances. Making your money work for you means that you have to have some in the first place to invest.
Bonuses can be a big help to our savings effort if handled the right way. It can be hard to resist the temptation to spend it on something that you’ve had your eye on, but being able to exercise some restraint can do much more for your long-term financial outlook than any short-term spending can do for your psyche. If you must take a small percentage out to treat yourself (and your family) to a nice dinner or other fun activity, and put the rest towards their future.
May 7th, 2008 at 7:43 am
[…] Joe D from Know The Ledge presents 7 Smart Places To Put Your Bonus. […]