You’ve worked hard all year and that long awaited year-end bonus is about to hit your paycheck. Next comes the big question, what to do with it? There are always competing priorities for this lump sum of money, so stop and think before it flies out of your account.
First off, take note of how much was withheld for taxes. Federal taxes are typically withheld at the supplemental rate of 22%. This might be below your marginal tax bracket, so be prepared to owe additional federal taxes if 22% was not enough withholding and set some cash aside to pay the tax at tax time or consider making an estimated tax payment.
When to Splurge on Something Fun
After you understand the net amount you have to work with, it’s time to treat yourself. You worked hard to earn the bonus, so now you should reap the rewards. Use up to 10% of the net amount to buy yourself something you’ve had your eye on or something that’s a splurge. If you never reward yourself, the deprivation becomes depressing. Segmenting off a sliver for a small indulgence recognizes your hard work, while still allowing the bulk of the bonus to be allocated for other goals.
Pay Off Any Debt
Now that you’ve rewarded yourself, tackle your finances in the right order. First, pay down any high interest consumer debt. Credit card interest rates have floated up over the past year, so payoff any outstanding balances and stop paying those banks to use their money.
After all debt is paid off, make sure your emergency fund is up to snuff. Aim to have three to six months of core living expenses held in cash. While you’re at it, check on the interest rate that your cash is earning. Chances are that if it’s at a local regional or national bank branch, it’s still paying close to nothing. Look at opening a high-yield savings account with an online bank and you can currently earn between 4-5% on your emergency cash.
Invest Surplus Cash
If you’ve made it through all the goals listed above, any surplus cash can be invested. Typically, the first target would be a retirement plan if you haven’t maxed out the annual limits yet. If you’re already maxed out for the year, the surplus can be invested in a taxable brokerage account as an opportunity fund, either earmarked for future endeavors or just parked until something that interests you come along.
Financial Success is Intentional
The key to financial success is being intentional. Applying a year-end bonus is no different. You should always know how any cash windfalls should be applied across your financial big picture. Then when the money hits your account, you know exactly what to do. There is no temptation to deviate from the plan and buy something unplanned. Being intentional brings long term financial success.
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