You have worked hard this year, and your employer has just rewarded you for your exemplary efforts with a bonus! Well done – you deserve this!
If you saw this coming, you may already have a plan for this windfall. But if this bonus comes as a surprise or if you haven’t spent it yet, spin through our shortlist below of fiscally savvy options for your prize money – choices that are sure to buy you sounder sleep at night by reinforcing your financial security.
Option #1 – Pay off high-interest credit card debt
More than one in three households carry revolving credit card balance from month to month, with an average amount owed of about $6,000. With interest rates averaging ranging between 14-22%, this debt needs to be slayed. If you are in this camp, it would be a great choice to apply that bonus check to freeing yourself from this debt.
Option #2 – Make a tax-advantaged savings contribution
There are lots of options available here but only for a limited time each year. With the year coming to a close, any last contributions into your 401(k) or other employer-sponsored plan need to be made before December 31. Annual maximums (not including employer match) for 2019 are $19,000 or $25,000 if age 50 and up. Talk to HR about depositing your bonus check directly into your 401(k) account if possible.
Other tax-advantaged contributions may be made by you directly and until April 15th of next year (the tax-filing deadline for this year). These include contributions to a health savings account (HSA) as well as contributions to an Individual Retirement Account (IRA) including Roth, traditional, SEP for self-employed individuals, and others. Check with your tax accountant to see how much you qualify to contribute to one of these accounts before making this deposit as earnings and income limitations may apply.
Option #3 – Beef up your emergency fund
We can’t predict emergencies, but we sure can plan for them. A good baseline emergency fund is three months of living costs. For even better sleep at night – especially if you have variable income due to rental properties, job uncertainty, self-employment – six months of savings or more may be better. Set these emergency funds aside in a stable savings or money market account where they can remain safe from market fluctuations while still earning interest or dividends for you.
Realize that all three of these options are ways to better position yourself financially and fortify your wealth. What better way to REWARD yourself with your bonus?!
These three options are generally listed in the recommended order of preference, but not exclusively. Each person’s individual finances (just like our DNA) is unique to us. Many will recommend building an emergency fund ahead of contributing to an IRA. I suggest the IRA first simply because there is a deadline attached, after which that year’s opportunity to contribute is forever gone. The emergency fund could potentially wait, unless of course, you were to have an emergency in the near term. Make the best decision for you that allows you to experience the greatest sense of security and the soundest sleep at night.
(Sweet dreams.)
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