8 Ideas To Make The Biggest Impact With Your Bonus
January 08, 2019This time of year, we often talk with people who are preparing to receive a bonus at work, either about how to make the most of it or how to best handle the taxes, or ideally, both!
Depending on your line of work, earning a bonus may come along often or only rarely, but regardless, when it does, it’s easy to start dreaming of a bigger home, nicer car or even just a fancier wardrobe. Sometimes, the money is literally spent on material things before we actually receive the deposit in our account.
Will it make a big difference? Could it?
At the extreme, many of us think that having more money will make our lives easier, only to find that when we look back over the years we’ve received the bonuses, we realize that the extra money was nice, but nothing really changed in the way we feel about our financial situation. Or we start expecting bonuses so that when they go away, we are financially unprepared for the loss of income.
Hitting the pause button
The next time you find yourself preparing to receive a bonus, before you start bookmarking properties or loading up your shopping cart, PAUSE. This is the perfect opportunity to make a huge impact on your future finances (yes, often by forgoing the immediate spending) and to ultimately make sure that you never have to revisit these thoughts again.
Here are eight suggestions that may not sound very exciting, but when taken seriously, can get you to the point of NOT depending too heavily on bonuses in order to have the life you dream of.
1. Accelerate debt pay-off – Use the Debt Blaster calculator to find out just how much sooner you can get those lingering student loans or credit cards paid off by making a big lump sum payment.
2. Bump up your emergency fund – If you don’t yet have several months of expenses set aside in a separate account, this is your chance to check that off your financial priority list.
3. Max out your Health Savings Account (HSA) – If you are enrolled in a High Deductible Health Plan (HDHP) but aren’t funding it to the maximum amount allowed, this is a good opportunity to do so. Not only will it reduce your taxes, but if you can avoid spending the money on everyday stuff and save it for potential bigger expenses down the road, it can serve as a back-up to your emergency fund.
If you haven’t contributed enough to hit the maximum allowed for last year, you actually have until the tax filing deadline in the spring to send a check or make a deposit directly to the financial institution where your HSA account is held and have it count as a deduction from last year’s income.
4. Contribute more to your 401(k) – Retirement may seem way off (especially if it literally is), but saving more in your earlier years will give you more options for later years. Use the Retirement Estimator calculator as a way to gauge how even just one percent more saved at a young age could mean retiring a year or more earlier than you expect, then consider using some of your bonus to allow you to bump up your per-paycheck contributions.
5. Save for short and/or long-term goals in a Roth IRA – You can put an extra $5,500 into a Roth IRA for 2018 ($6000 for 2019), and even more if you’re 50 or older. When just starting out, a lot of people actually use a Roth IRA as another back-up emergency savings account. Since whatever you contribute can always be taken out tax-free and penalty-free, it can be a way to build up an emergency fund, while also boosting your long-term savings if you end up not having an emergency.
Check out these 12 benefits of a Roth IRA on top of that. (By the way, you can still make a 2018 contribution to a Roth IRA by the tax filing deadline of April 15, 2019.)
6. Purchase some stock through your Employee Stock Purchase Plan (ESPP) at work – If your employer offers an ESPP, it’s a great way to get more bang for your buck because you purchase shares of your employer’s stock at a discounted price (or least without having to pay a brokerage commission). You can leave that money alone until retirement or some people prefer to sell right away to take the earnings from the discount, then put that money toward their next big vacation (or one of the other 7 options here).
7. Set it aside for future education needs – This is a great opportunity to boost savings for your kids’ (or other loved ones’) education expenses. If you don’t already have a 529 account, that’s one way to get started. There are other ways to save as well, which are included here.
8. Accelerate your mortgage pay-off – Maybe you dream of paying your mortgage off early – your bonus can help you make extra principal payments and get you closer to achieving that goal. You can run the numbers with this calculator (scroll down to see the impact of an extra payment or two each year.)
Beware of lifestyle creep
At the end of the day, the point is to enjoy life and a part of enjoying life is having enough money to pay the bills and save for the future while still living in the moment! Beware of lifestyle inflation: our “needs” tend to grow as our income grows. I’m not suggesting that you continue to live like a college student, but living below your means is the key difference between most “everyday” millionaires and those who may earn the same salary, but spend every dime they have.
Like I said before, be careful you don’t become dependent on your bonus for living expenses and instead use them as an opportunity to supercharge goals you’re already working toward. You put in the hard work needed to earn those bonus checks. Now, make the most of it by making sure you are financially stable in the future.