Cha-Ching! Your annual salary bonus has arrived in your bank account. Was it a pleasant surprise? Did you get flashes of a nice tropical vacation with a cool alcoholic beverage in hand?
With that “extra” paycheck, have you decided yet as to what you are going to do with it?With annual employee reviews in full spring it is time to think about where you want that money to go. It might be time to think about where to shop, I mean on how you can make your money grow. Yes, Uncle Sam might be taking a chunk of it, but this money should be a nice windfall regardless. Bonuses can range widely depending upon income, industry, and performance. Typically, bonuses are between 5-10% of your annual salary. If you make $65,000 a year, and your company gives you 10%, you have $6,500 to play with – that is, before the government takes their piece of the pie. So, don’t get used to what your company might be telling you initially – wait for the money to drop into your account.
Next is deciding on a few ways to spend your bonus money. Try not to think of this money as something you can use to splurge on. With this mindset, you might get something that you cannot afford to sustain long term, like buying a new car but not taking into consideration different insurance, gas, and fees associated with the purchase. Make sure you determine what you are going to do with your tax refund first before getting it not after you receive the amount.
Here are a few ways to spend your bonus
Pay Yourself First… in your Roth IRA
If you are contributing to a 401k that is awesome. If you want more of a retirement cushion, invest in a Roth IRA. A Roth IRA is an additional investment retirement vehicle that you can max out each year at $6500 (if under the age of 59 1/2).
Roth means that when you retire, your distributions (what you take out of the account) is tax free. This option is great because it allows your money to compound (grow) tax free.
For example: Say your IRA account is at $100,000 when you retire. With a traditional IRA, when you take the money out of your account, you will be taxed on the amount that has grown ($100,000) versus the $5,600 you put in during your 20s. Essentially, with a Roth IRA, you potentially get taxed less than with a traditional IRA.
Contribute to your Fun Fund
Indulge yourself with something that you might have wanted. Albeit, hopefully something small that is a nice reward for working hard, like a spa day. It is fine to make plans, but don’t spend the money before it even arrives in your bank account. When you know it is coming, it is easier to justify the purchases and say that the money will be there.
Now, don’t go putting all of your refund into your fun fund, but definitely look at taking a portion of it. You worked hard, so pamper yourself.
Add to your Emergency Fund
This account is never fun to think about, especially if you have to tap into it, but $500 or $1,000 deposit into your emergency fund can be a great start to growing it or adding to it. You never know what might happen and it is good to set aside some money in case of emergencies.
How much should you have in your emergency fund? Roughly 3 to 6 months worth of expenses. Make sure your housing, food, and bills are covered with this money for a substantial amount of time.
Pay off Student Loans or Debt
Overspent a little bit on a shopping spree? Want to pay off those loans a little faster? Adding an additional payment can only help your credit score and lower the balance you owe. See how much an extra payment would be – remember you would not have had the money regularly, so what is another payment anyway?
Don’t forget about the emotional factor for when you make an additional payment – the feeling of relief. Now this feeling is priceless.
Invest the Money
This is what I plan on using most of my money towards. I will put some in a robo advisor investment account, and a little into some yearly savings accounts, and of course I will pay my self by putting a large chunk into my Roth IRA (see above).
Most of my investing will be in the stock market, but maybe in a few other ways as well: art or into a business. The options are endless!
Bonus: Build a Plan for Your Bonus Raise
Start now and work out a place for your bonus. Fill out this simple form and build a plan for your money.
Step 1: Write out your main goal for the money
i.e. grow my wealth
Step 2: How much do I want to put towards me, my future, or my past?
i.e. retirement, fun fund, debt, investing etc.
Step 3: Assign a Percentage to Your Goal
i.e 20% towards my retirement, 5% towards my fun fund, 50% for investing, 15% towards my emergency fund
Step 4: Execute!