Six Ways To Spend Your Year-End Bonus Wisely
Six Ways To Spend Your Year-End Bonus Wisely
Are you getting a year-end bonus for 2023? If you first envision an exotic trip or big-ticket purchase like a car or boat, pause and evaluate how to make the most of this extra money. As your financial advisor, we recommend tackling your responsibilities before getting to the fun stuff. That doesn't mean you can't enjoy yourself a little, but keep the following priorities in mind before you go on a spending spree.
- Attack debt first. Let's face it. Paying off debt is the least enjoyable way to spend your unexpected cash windfall, but it is the best bang for your buck. By allocating money to pay off the debt with the highest interest rate today, you'll have more money to spend down the road without that debt to repay. Your future self with thank you!
- Set up (or increase) your emergency fund. If you don't already have an emergency fund, open a savings account separate from your checking account, preferably one paying interest. You can search online for savings banks like Ally, paying a 4.25% annual percentage yield (as of 11/29/2023). Your emergency fund protects you from stumbles that might bust your monthly budget, such as major car repairs, medical bills, or sudden job loss. Aim for three to six months' expenses in your fund if you get a regular, dependable paycheck. Consider six to twelve months' expenses if your income is somewhat unpredictable.
- Max out your 401(k) or individual retirement account. Use your year-end bonus to top off your retirement account with the yearly maximum of $22,500 for 2023 into a 401(k) or 4o3(b), plus $7,500 for those age 50 and older. Contact your human resources department if you need help changing your deferral election so the contribution comes directly from your paycheck. If your employer doesn't offer a 401(k), you can use your bonus to open or help fund a Traditional or Roth IRA and try to hit the max ($6,500 in 2023, plus a $1,000 catch-up contribution for age 50 and older).
- Invest in yourself. What would increase your productivity, happiness, or knowledge? Invest your bonus in yourself and take a class, continue your formal education, or add to your skills. Or use the bonus as seed capital to start a new business. Have you always wanted to learn to dance the Salsa or get a scuba diving certification? Do you want to have a weekend food truck hustle? Use your bonus fund to invest in something that will last much longer than one season.
- Give to charity. Use a portion of this extra income for philanthropic purposes. When you donate to charity, not only does it serve as a financial boost for the less fortunate, but it also provides a sense of gratification. While the return on such an investment won't appear in your bank account, it pays back in goodwill dividends. The joy it brings far surpasses the instant gratification of self-indulgence.
- Splurge wisely. You can and ought to indulge a little. While money can't buy you love, a little extra cash in your pocket can buy a bit of happiness when you put it to good use. Consider 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 have always dreamed about attending. Travel to visit a friend or family member you haven't seen in a while. Spending money is a good thing.
The Bottom Line
You needn't stockpile every last cent of your bonus. But spend mindfully on what you really value. Ultimately, the best use for your bonus depends on your individual needs and goals but a good rule of thumb is to divide your money, half toward your debt, 25% toward savings, 20% to splurge, and 5% to charity. If you would like assistance creating a personalized savings and spending plan, schedule an introductory call with a CERTIFIED FINANCIAL PLANNER™
today.