This article was featured in Maine Women Magazine, December 2021
Receiving a year-end bonus is far from a universal experience. However, many people end up with a little extra cash around the holidays. Depending on your financial circumstances, this can be exciting, overwhelming, or some combination of the two.
Below is my guide for making the best use of your bonus or any other “windfall.”
- Pay off any high-interest debt first, such as credit cards.In most cases, interest on credit card debt is accumulating more quickly than your money can grow in the stock market or elsewhere. Using a bonus to pay off debt is certainly not fun, but it’ll do wonders for your personal “balance sheet.”
- If it’s a large windfall, consult an accountant.A big bonus probably has income tax implications, while insurance proceeds are generally not taxable. A CPA can explain any tax consequences and help you make tax-smart saving and spending decisions.
- Determine what percentages you will spend and save.There is no universal percentage to recommend here, but spending some and saving some allows you to reward yourself while making a responsible decision for your future. If you don’t already have a solid emergency fund, your savings should stay in a bank account.
- Avoid unsustainable spending situations.You don’t want your bonus to backfire by using it to overextend yourself. For example, using the bonus for a down payment on a car doesn’t make sense if you won’t be able to afford the monthly payment with your regular salary. Additionally, don’t rush to update the income in your budgeting app or spreadsheet. Be honest with yourself about the likelihood of repeated bonuses. Your monthly budget should reflect your “average” income situation.
- Consider tax-advantaged accounts for the amount you will save.Grow your retirement nest egg by adding to your 401(k) or a Roth IRA, if you’re eligible. Investing in retirement accounts generally comes with some type of tax advantage over using a regular brokerage account. If saving for a child or grandchild’s college tuition is one of your goals, invest in their future using a 529 account. If you use the Maine NextGen 529, you might even score some “free money” from their matching program.
- Add value to your home that you will enjoy.This is a “best of both worlds” scenario. If you are a homeowner, you likely have a few home improvement projects on your to do list. Perhaps there is a project that adds financial value AND helps you enjoy your home more: higher end countertops, a new appliance, refreshed landscaping, etc.
- Treat yourself.Let’s be real…it’s been a long few years and you’ve worked hard. You probably spend more time caring for others than worrying about yourself. Set aside some funds to spend on you and you alone, and don’t feel guilty! You deserve it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.