Great ways to use you bonus or refund check-I can help you with this. Pat
Annika Cushnie, partner and wealth advisor at Brightworth
It’s the most wonderful time of the year, Christmas notwithstanding. Bonus checks will arrive during the next few weeks for hundreds of thousands of executives and managers nationwide.
While most have anticipated this cash windfall for months, many don’t have concrete plans on how to best save, invest and spend these dollars. Worse yet, some will choose to make a large purchase that will eat away at their long-term financial health
The year-end bonus is a reward for a job well done — so use a portion of these funds for something that brings you joy and happiness. But it’s also critical not to squander this money; instead, allocate it wisely to meet short- and long-term financial goals.
Everyone has different financial goals, but all of us have one common objective: Saving enough money to be financially independent. For example, for every $1 million of diversified investments in your nest egg, you could expect to withdraw an estimated $40,000 per year before taxes for 30 years.
Your investment portfolio, plus Social Security and pension income, are the key elements for a successful retirement.
With financial independence as the end goal, here are five recommendations on how to best allocate that bonus check.
“With bonus checks around the corner, take time now to develop a game plan on how to spend and invest yours. Doing so will also help put you on a path to be diligent in saving and investing throughout the year.”
1. Determine how much needs to be set aside for current-year taxes and next year’s estimated taxes. Many executives and managers exercised stock options or had other payouts during the year. If sufficient taxes weren’t deducted from these transactions, you’ll need to cover this amount with part of your bonus. People with a large state tax liability may even want to buy tax credits.
2. Replenish your emergency fund. Budget money to cover unforeseen major expenses, ranging from car repairs to a new furnace. A good rule of thumb is to have three to six months’ worth of living expenses set aside. Also, if you don’t have a home equity line of credit, get one. It will help provide short-term funds to cover any major expense not covered by your emergency fund.
3. Pay down debt and map out larger lump-sum expenses for next year. Knock off a chunk of high-interest credit card debt and amounts owed on home equity lines of credit. Next, set aside enough funds for property taxes, home improvement projects and travel plans. These can be substantial expenses, and you don’t want to borrow to pay for them.
4. Know your number for financial independence, then reach into your bonus to reach that goal. Allocating funds for this purpose gets to the heart of any long-term financial plan. Keep in mind that your annual savings goal includes any amount you’ve contributed to a 401(k) plan.
Don’t bank on a pay raise: A recent study proclaimed troubling news for workers: For the fifth year in a row, employee bonus pools will come in below target, according to benefits consulting firm Towers Watson.
For example, if you contributed $18,000 to a 401(k) plan — the maximum amount — and you want to save $30,000 each year, you’ll need to invest $12,000 from your bonus.
In addition, explore investment options outside of the 401(k), whether it’s an individual retirement account, Roth IRA or a taxable investment. In some cases, there may be an opportunity to contribute to a Roth IRA, which has tax-free growth.
5. Fund your children’s college education. As tuition costs climb, saving early for education is one of the most important decisions any parent can make. A 529 plan is a college savings account that’s exempt from taxes. There are also additional tax benefits for people in a variety of states.
With bonus checks around the corner, take time now to develop a game plan on how to spend and invest yours. Doing so will also help put you on a path to be diligent in saving and investing throughout the year. Finally, a plan will provide the answers for how to invest future bonuses and set you up down the road for financial independence.