With the new year well underway and many of us getting restless from the winter doldrums, a bright spot for many corporate employees is that we’re entering bonus payout season. You worked hard last year, added value to your company, and your effort paid off as you anticipate a healthy bolus of cash coming your family’s way this spring.
The options of how to spend that hard-earned bonus are seemingly endless, especially for those with school-aged children at home and spring break on the immediate horizon. What’s the “best” way to balance celebration and pragmatism when allocating your bonus payout?
While the right answer is different for everyone, there is one commonality: creating a plan on how to allocate the bonus before it’s direct deposited can help you get the most out of those hard-earned dollars. By figuring out your priorities, you can create a plan that strikes the right balance between enjoying the fruits of your labor and making your money work for you longer term.
To get started, answer four questions to discover your priorities and use your bonus as an opportunity get ahead on your family’s goals.
How Much Will You Invest in Yourself?
At its core, your annual bonus is a reward for your hard work. For many, spending 10-20% of that extra income on themselves has a powerful ROI. It provides personal satisfaction and a sense of pride.
For instance, why not spend part of your bonus on a well-deserved family vacation? Or put it toward a larger goal than you’ve planned, such as a down payment on a second home for more consistent family getaways. Taking time to replenish energy and reconnect with family can pay off in untold dividends.
Looking for other smart ways to spend on yourself? You could also use the extra money to invest in career-advancing efforts: an executive coach to expedite your career trajectory, or you can seed a side hustle that can pivot into small business ownership or a passive income stream down the road.
By allocating a portion of your bonus to yourself, you can make a big impact on your overall well-being. With forethought, it’s possible to celebrate your accomplishments while still focusing the bulk of the funds on achieving your financial priorities.
Should You Replenish Your Emergency Fund?
When corporate employees achieve a healthy income, they sometimes succeed so much at saving for the future – maxing out their 401(k)s – that they forget to save for the more near-term rainy days. Saving for retirement is paramount for many, but don’t lose sight of keeping liquid assets on hand for emergencies, as well.
To avoid the stress of an unexpected roof replacement or HVAC system overhaul, experts recommend having six months’ worth of living expenses in your savings account. As your salary and household budget both increase over time, having half a year’s living expenses in relatively liquid form can be more challenging than it sounds. Using some of your bonus to pad a short term savings account can boost peace of mind.
Having this six-month safety net can also give you a sense of freedom relative to your career path. With the Great Resignation still underway and corporate work environments ever shifting, the new normal is to expect the unexpected. What if you decide to change jobs but want to take a month off in between? Or a permanent virtual work arrangement triggers your family to uproot and relocate for better quality of life?
A savings safety net can provide a sense of confidence and the freedom to pivot when you need it most.
Could Frontloading Your Child’s 529 Plan Pay Off?
To save for your child’s college and multiply the benefits of your bonus, think about contributing to a 529 account. In many states, 529 plan contributions are also tax deductible up to $8,000 – which is like using your bonus to give yourself another mini bonus.
With the cost of college increasing significantly every year, it’s more important than ever to invest in your children’s future today. A 529 plan allows your earnings to grow tax-free, and your withdrawals aren’t taxed, as long as you use the funds for qualified education expenses.
Additionally, 529 plays can yield opportunities to offset the cost of private school, offering creative cash flow management solutions for your family long before you start touring colleges. For more detail on the potential power of the 529, click here.
Is it Time to Augment Your Portfolio?
Odds are you long ago eclipsed the income limit for Roth IRA contribution, but you’re taking the right steps by maxing out your 401(k) and potentially even exploring deferred comp. When looking at building your portfolio around the ever-changing tax codes, it’s important to make sure that you have the right approach to manage your overall portfolio both today and in your retirement years.
That’s why it’s important to have a strategy for your overall portfolio that includes diversification into taxable growth accounts and potentially other investment vehicles. Work with your wealth strategist to create a personalized plan that contemplates investment opportunities outside of your core retirement funds. Based on your current situation and risk. tolerance, using your bonus to grow your taxable investment portfolio can help you build generational wealth.
Your annual bonus is an excellent opportunity to revisit how your life and wealth can appreciate together. However you end up allocating this component of your total compensation, it’s worth pausing to create a strategy that fits your family’s long-term financial goals.
Enlisting the objective input of a financial advisor can help you think through priorities and opportunities, so don’t hesitate to call on us to craft a plan that works toward maximizing this year’s bonus.