Spending money isn’t a bad thing, but spend mindfully
Did you receive a year-end bonus for 2019? Suspend your visions of spending on exotic trips for a moment and instead evaluate how to make the most of this extra money.
Your year-end bonus remains taxable income and you can make smart decisions to use it responsibly, as you do (presumably) all your other pay. That doesn’t mean you can’t enjoy yourself a little, but keep priorities in mind. Consider these ideas:
Tackle Debt First
Using your bonus to accelerate debt repayment is smart, especially if you put extra funds toward your debt that carries the highest interest rate: the higher the rate, the more money balances cost you over time.
Call your credit card companies if you’re not sure which card has the highest rate. Not sure about your student loan rates? Log in to your account at studentloans.gov, where each of your loans’ information includes the interest rates.
Set Up An Emergency Fund
If you don’t already have an emergency fund, create one in a liquid account (meaning you can get the money fast) and contribute to it. Your emergency fund protects you from stumbles that might bust your monthly budget, such as sudden job loss.
Aim for three to six months’ expenses in your fund if you receive a regular, dependable paycheck. If your income or job situation is less stable or less predictable, consider six to twelve months’ expenses.
You might also set aside money for other expenses that are difficult to budget for. For example, you can put money in a separate account to cover car or home repairs, set up a health savings account for unpredictable medical bills, or just put money in your savings account for medical care. Some pet owners maintain pet emergency funds to cover veterinary bills.
Max Out Your 401(k) Or Individual Retirement Account
If you already regularly contribute to a retirement account, you can use your year-end bonus to put the yearly maximum in your 401(k). This saves for your future, reduces your taxable income, and takes full advantage of your job’s benefits. If your employer doesn’t offer a 401(k), you can use your bonus to open or help fund an IRA.
Of course, you can still use your bonus to open and fund another account even if you already have a 401(k) or similar employer-sponsored plan.
Invest In Yourself
We often talk about investing your money to let it work harder for you. What about investing in you to increase your productivity, happiness, or knowledge? Invest your bonus in yourself and take a class, continue your formal education, or add to your skills. Your human capital is one of your greatest assets.
You can and ought to indulge a little. Money often allows you to build security and stability. However, it also buys a bit of happiness when you put it to good use: spending on experiences and relationships and not on just more stuff.
Take yourself and a loved one on a fun and economical trip. Go to an event you always dreamed about attending. Travel to visit a friend or family member you haven’t seen in a while.
Spending money isn’t a bad thing. You needn’t squirrel away every cent of your bonus. But spend mindfully on what you really value. Consider dividing your money, perhaps half toward your debt, 30% toward savings, and 20% to splurge.
Ultimately, the best use for your bonus depends on your individual needs and goals. Any of Patriot’s Advisor’s can gladly assist you with these decisions. Contact us if you’d like to optimize your bonus this year. Spend wisely and have a Merry Christmas!