If you are anticipating an annual bonus this year - some companies have managed to fare well during the pandemic - it’s wise to come up with a thoughtful plan for the extra cash before it comes so you can get the most benefit from it. If you need more time to consider your options, deposit the money in a savings account. It will be harder to chip away at it if it’s not connected to your debit card. Here are a few other suggestions:
Account for Taxes. If your employer doesn’t withhold taxes from your bonus, or doesn’t withhold enough, make sure to set aside money for tax time so you’re not hit with extra tax burden.
Increase your Bonus’ Value. Contributing the maximum allowed to a pretax employer retirement plan can make your bonus go farther than using after-tax dollars, especially if your employer matches the contributions. If your income falls within IRS guidelines, you may be able to make pretax contributions to your 401(k) and a traditional IRA or add post-tax contributions to a Roth IRA, which will grow tax-free.
Put Your Money to Work. Since a bonus is extra money, it may be easier to use it to for an investment with long-term growth potential rather than coming up with additional investment money from your regular pay.
Build Your Emergency Fund. Everyone should have liquid savings available to cover at least six months’ worth of living expenses should the unexpected occur. If you keep your fund in a savings account, consider shopping around for the best rates, or consider a short-term CD.
Invest in Yourself. Many of the most successful people continually pursue knowledge and increase their skills. You might take a coding course, learn a language, hire a health coach, pay for a professional certification, or enroll in a professional speaking program
Plan an Experience. Research indicates great memories often provide more satisfaction than purchases. After a rough last year, planning a future vacation or having funds accessible when travel is possible again can give you something to look forward to.
If you have funds from an annual bonus that you’d like to discuss or any changes to your financial goals for the year, we’d love to hear and put a plan together to help you reach those! Please don’t hesitate to give us a call.
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January 08, 2021