tips on how to get over the excitement and make very good use of this ‘extra lump sum’

 tips on how to get over the excitement and make very good use of this ‘extra lump sum’

I know the excitement that comes with a bonus or a sudden pay rise. It feels different from your monthly salary. Do not be fooled though; this is not lottery. It is taxed as ordinary income. Since every dollar from your salary is usually planned for; rent food, savings and entertainment, it starts to feel boring. But a bonus or a tax refund feels like a windfall. It is also pretty easy to spend because it feels like ‘found money.’ No it is not. A dollar from a bonus is exactly the same as a dollar from your salary and must be spent wisely. Here are tips on how to get over the excitement and make very good use of this ‘extra lump sum’.

Pay off debt

Clearing debt as fast as possible is a top priority for most prudent financial managers. Debt comes with interest that keeps accruing over period owed. Once you get a bonus or refund, consider paying off debts especially those with earning high interests. For a pay rise, consider increasing monthly repayments for mortgages, credit cards, student loan, or car loan. If you can clear all the outstanding debt; do it to ease the pressure on your salary.

Retirement savings account

For your retirement, you can either improve your 401k or open another retirement savings account. Income in retirement is a big deal for most Americans. If you are not at your maximum allowable contribution boost your savings with $19,000 in 2020 and an additional $6,000 catch up contribution if 50 and above.

Depending on whether you qualify, think about investing your bonus or refunds in an Individual Retirement Account (IRA) or Roth IRA. For both traditional and Roth IRA you can invest as much as $6,000, with a catch-up contribution of $1,000 if you are 50 and above.

Make your first investment

Most people wait to accumulate a lot of money to make investments. If you have been shopping for investments where you can make substantial investments for better and steady returns, put your bonus in a good investment vehicle. There are a couple of options to consider; actively managed funds, index funds, a 529 plan, or low-cost index funds are highly recommended.

Boost your emergency fund

According to CNBC, only 47 percent of Americans are ready for an emergency, and a whopping 60 percent of millennial cannot handle a $1,000 crisis. Recently, we have had to content with a world of uncertainties than ever before. With increased interconnectivity in both financial and product markets, a bad time in one side of the markets will quickly spill over to the global markets. Everyone will feel the pinch in their pockets. One of the most realistic ways to survive and protect your finances is to have a well-endowed emergency fund to cushion you during such times. With a good emergency fund you will not have to liquidate your assets at a loss or get high cost loans to survive through hard times.

Pick something from your wish list

What is that one thing you’ve really wanted to do but kept putting it off because of finances? It could be a gift for a loved one or yourself, a holiday or a donation towards a cause that is really dear to you. Give towards that because the gratification from it will remain memorable and fulfilling for a while. It also a great idea you are most likely being rewarded for stellar performance or a refund after a tax compliance. Spend a portion of it on ‘a pat on the back’ package to stay motivated.

Consider Uncle Sam

There are two ways you can do this based on regularity of your income. If you are anticipating less income next year, defer the bonus to pay less overall tax on it. If you owe additional federal or state taxes, determine your tax liability and use a part of the bonus to stay out of prison.

I have existing annual financial goals…

Great! Then think in percentages. The best part about having an existing financial plan is that you can have all the above ideas catered for by allocating a percentage to each of your financial goals. For example,

• Retirement: 15% will go to pre-tax 401(k) before you even receive the check
• Long-term goals: 15% invested for a bond market or a down payment on a house
• Debt repayment: 25% is allocated to settle high-interest debt or to pay down a mortgage
• Perk up savings: 25% to add to your emergency fund
• Bucket list: 20% for something you have wanted to do for yourself in a while

Sometimes fulfilling long-term financial goals is difficult since the regular income is spread over basics, taxes and fees. Bonuses offer a perfect opportunity to fulfill or boost both short and long plans without saving forever. You just need to plan for t adequately.