If you’re one of the lucky people who receive an annual bonus, you know the excitement of logging into your bank account to see the jump in your balance. Your heart speeds up a bit. The money has so many amazing possibilities.
You may also experience a feeling of pressure. Now you have to do something with your bonus, and you just might want it to be the right thing.
Two-thirds of my income used to come from an annual bonus. One day a year I would be paid more than I earned the other 364 days combined. Every year I knew the decisions I made on that day would determine my financial future.
Even if your bonus doesn’t represent the majority of your income, it can help you make big strides toward your goals. So, before you order that new big screen TV, consider these 8 things to do with your bonus to help you feel more financially secure all year.
Pay off debt
An annual bonus is a perfect time to jumpstart your journey towards debt freedom. Consider using it to help pay off lingering credit card debt, hack away at your student loans, or chip away at other liabilities.
Focus first on high-interest debt that may be negatively impacting your ability to save for your future. Ridding yourself of those interest payments delivers a huge reward. When you don’t pay interest to creditors, you can choose instead to invest your dollars in your future or put them towards other goals – like that family vacation.
Boost your retirement savings
Retirement may still seem like a distant dream, especially if you’re busy managing a young family. But if you want to have the comfortable golden years you envision, saving now is the best way to work towards that goal.
You could use your bonus to boost your 401(k) contributions or fund a traditional IRA. That creates a double benefit: you’ll receive tax benefits now for making the contribution and any growth is tax-deferred, further enhancing your nest egg for the future.
Solidify your emergency fund
It’s easy to fall into the treat yo’ self mindset when you’re flush with cash during bonus season. That new tablet or fancy vacation starts looking pretty good. Just remember, life is still life. Financial emergencies aren’t “if,” they are “when.” Using some of your bonus to bolster your emergency fund now could help you weather unexpected financial downs later in the year.
Financial experts recommend a minimum of $1,000 in an emergency fund, and to work towards having 3 to 6 months of expenses in liquid savings. Review your current emergency fund and determine how you’re doing. One way to fill gaps is to put your emergency savings (and at least some of your bonus) in a high-interest savings account where your money will remain secure and accessible while reducing inflation drag.
Invest in peace of mind
As the breadwinner for my family, I used to worry about how my husband and young boys would cope if something ever happened to me. Which is why, even at only 28-years-old, I have sufficient life insurance and a full estate plan. I can hope that I never need it. But I sleep better knowing it’s there and that my family will be fine no matter what happens.
Luckily, you should only have to use a small portion of your annual bonus to invest in this peace of mind. A 32-year-old female non-smoker in excellent health can get a $1 million Haven Term policy issued by MassMutual for as little as $56.18 per month. And now the Haven Plus rider, which is included in the Haven Term policy, offers policyholders access (subject to state availability) to a complete legal will online, with a year of unlimited updates, at no cost from Trust & Will.
Expand your skills
Your annual bonus shows that you’re a valuable member of your company. Take your earnings power to the next level by continually improving and expanding your skillset.
Consider using your bonus to invest in a public speaking course or to learn how to use new software that is growing in your space. Look over your last performance review and think about the skills people in positions above you have. Then find any areas you may want to improve before you ask for that promotion. Invest now to build those skills for yourself.
Alternatively, if you dream of becoming an entrepreneur, you could sign up for a business or sales class. Put aside some money towards starting your business while you’re still working so the financial transition is less abrupt when you’re ready to make the jump.
Invest in your children’s future
College is expensive and the costs are only going up. Consider using your bonus to invest in a 529 College Savings plan for your kids, or to bolster college savings you already have, to help cover costs and possibly help your kids avoid student loans when the time comes.
If your child already has earned income, and you aren’t sure if they’ll go to college, you could also consider opening a custodial Roth IRA. The assets in this account will belong to your child, but you’ll have control over them until your child turns 18 or 21, depending on your state. Your kids will have the ability to make withdrawals, without penalty, for qualified education expenses or their first home. And they can remove the principal anytime to start a business or start their adult lives on the right foot. Just remember that annual contributions limits are $6,000 per year and you can only contribute up to the amount your child has in earned income.
Save for big goals
Are you hoping to buy a new home, go on a luxury vacation for your anniversary, or make a major career change? Use your bonus to get closer to those dreams.
Put a little money towards each of your goals or review all of your goals to determine which are your highest priorities today. For long-term goals, like a vacation home in 10 years, consider investing the funds so your money can work for you. With shorter-term goals, consider a designated high-interest savings account so you know it’s there when you’re ready for it.
Usually, we’re chipping away slowly at the big things we want in life. Saving a bit each month. A bonus gives you the ability to make a big impact.
Treat yourself to something fun
It’s great that you want to make a smart money decision with your bonus this year. But don’t forget that you worked hard to earn this bonus and you should allow yourself to have a little fun. Make a decision as a family for a fair percentage of the bonus that can be used guilt-free for your enjoyment. You deserve it.
Make your extra cash go the extra mile
Receiving your annual bonus is often one of the most satisfying days of the year. You’re flush with cash and there are so many attractive options floating in your mind. This year, before you head out for a fancy dinner or jump online to shop, consider the things you really want in life.
Whether you choose to let your bonus help tackle your debt, prepare for your children’s future, or increase your peace of mind by putting a life insurance policy in place, you can make that feeling of financial security last all year and beyond.
Chelsea Brennan is the founder of Smart Money Mamas, a personal finance blog that focuses on family finance, investing, and reducing money stress. Chelsea is an ex-hedge fund investor whose work has appeared in a wide array of publications, including Forbes, Business Insider, and more. Opinions are her own.
All investments are subject to risk, including the loss of principal.
Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.