What Should I Do With My Bonus?
Many companies close their books from the prior year and pay out annual bonuses in the month of March. One of the most common questions we get asked as financial planners is "what is the smartest thing to do with my bonus?" You worked hard to earn that extra cash - why shouldn't it work for you? Below are a few strategies to consider:
- Pay Down Debt
If your spending exceeded household cash flows last year and consumer debt (like a credit card balance) is being carried, paying off/down debt is always a smart move. No matter how the markets perform in the future, having a guaranteed savings of 10%-20% (or whatever your card charges you annually) better positions you to save in the future.
- Boost Your Emergency Reserves
We recommend at least three months of cash in the bank for two income households, and six months for single earner households. Whether it's an unexpected home repair, medical bill, or a furlough brought on by a global pandemic, having a proper cash reserve for emergencies is prudent.
- Invest for the Future
For those with patience, the value of compounding return over a number of years can yield great results. Your bonus could be a great way to kickstart or add to your portfolio. Consider investing in areas you feel will do well over the next 3-5 years or diversify into an index fund. If you aren't sure, let your financial planner guide you with the best investment strategy for your personal situation.
- Plan a Vacation or Memorable Experience
You weren't expecting this one, huh? It's truly remarkable how fast life passes by. If you are in a stable financial situation, consider planning a trip or memorable experience for your spouse and/or kids. Don't think you need to rent out the penthouse or jet-set to a private island - a road trip to the beach or even a trip to the zoo or your favorite sporting event could be a treat.
Lastly, remember that a bonus is just that - a bonus. Be careful making financial commitments or developing spending habits based on income that may not be guaranteed.
If you are fortunate enough to get an annual bonus, make sure you consider your personal financial situation and goals when evaluating how to spend it.