8 Wise Money Moves to Make With Your Bonus

Congratulations on your bonus! Here are nine smart ways to put the funds to good use.

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Better Investing

You just received a bonus at work, and the first word that comes to your mind is “splurge.”

But that can be a mistake. Although you are entitled to use the funds however you please, making the right moves can lessen financial burdens now and later on down the road.

If you earmark the money for savings or to pay down debt, make a plan and execute it promptly. That way, the funds won’t grow legs overnight and run away.

The longer the money sits, the more tempted you may be to waste it on meaningless purchases.

Here are some suggestions for putting a bonus to good use:

1. Tackle credit card debt

Paying down debt balances can save you money that otherwise is wasted on interest payments.

The debt snowball method — which suggests you tackle the smallest balance first to build momentum — is recommended by some experts. However, it makes better financial sense to tackle the debt with the highest interest rate first.

For more tips about quickly eradicating those credit card balances, read “7 Steps to Get Ruthless About Paying Off Your Debt.”

2. Get caught up on past-due bills

If you have bills that are past due, paying them down should be at the top of your priority list. Unpaid bills put you at risk for a slew of late fees and interest penalties.

Past-due bills also are likely to wreak havoc with your credit score if you do not pay them off.

3. Boost your emergency fund

You can also use the extra funds to beef up an emergency savings fund. That way, a layoff, medical emergency or other unexpected event or expense won’t quickly turn into a financial nightmare.

If this is your plan, shop around at financial institutions for savings accounts that offer a greater return on your money. And be sure to take a look at “9 Ways to Build an Emergency Fund When Money’s Tight.”

4. Beef up your nest egg or other investments

If you have not maxed out contributions to your 401(k), this may be the perfect opportunity to do so. You don’t want to miss out on free money in the form of matching contributions from your employer, or the tax breaks you get from your contributions.

Failing to build a nest egg today could very well mean that, someday, you will retire poor.

From our Solutions Center: Maximize your Social Security benefits

Another benefit of beefing up your nest egg is the beauty of compounding interest. It favors those who make smart investments early on.

If you’ve already maxed out retirement savings, invest the money in nonretirement accounts. If you are intimidated by the thought, seek out a fee-only financial adviser for guidance.

Money Talks News finance expert Stacy Johnson offers some tips on how to locate and select a reputable financial adviser.

5. Establish a college fund

Planning to incur higher education expenses for yourself or your children in the future? Prepare ahead of time by opening a 529 plan, which allows money to grow tax-deferred while you save for college.

In addition, withdrawals from a 529 plan are tax-free as long as they are used for university tuition or other qualifying expenses.

Before making the leap into a 529 plan, speak with a financial adviser to determine if other plans, such as the Coverdell education savings account, better suit your needs.

6. Home improvements

A bonus can be the source of repair funds for those who have a leaky faucet or an ancient air conditioning unit. Use the funds to take care of those problems now before they end up costing you more in the long run.

Check out “8 Home Improvement Projects That Pay Off Big.”

7. Be charitable

Donating your bonus funds to a good cause will warm your heart and could reduce your tax liability. To determine which contributions are tax-deductible, refer to IRS Publication 526, or use the IRS online eligibility tool.

8. Live a little

While it’s important to be smart with your money, it is also OK to live a little. So allocate a small percentage of your bonus to a slush fund and give yourself the proverbial pat on the back for all of your hard work.

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Comments

  • Kim

    Great advice, but I have never held a job that pays bonuses.

  • grandmaguest

    All excellent ideas!
    As a side note I would add, consider putting the funds into a Roth IRA (or some other type of Roth depending on your situation), and think about adding to it as often as you can. You can even bookmark it as an education fund. After 5 years you could, if needed, pull the principle (and possibly all with out tax penalty I believe) to help fund college for yourself or children. And should your children forgo college, you have a nice nest egg for your retirement. Make sure you check out the taxes on this but I do believe you are allowed to use this money for college or even (if I remember correctly) for a down payment on a house. Again, though, it has to set for at least 5 years, but if you start this when your kids are babies or before they are born(?) wouldn’t that be a nice little nest egg. Of course, I would also suggest you do a study on this first, and of course make sure your 401 or other retirement accounts are funded as well. For some this might work better and give you more control of the funds and their use than a 529.

    • http://ecofrugality.blogspot.com/ Amy Livingston

      Query: why a Roth and not a traditional IRA? As I understand it, the difference is that money in a Roth is taxed when you deposit it, while money in an IRA is not taxed until you withdraw it. So, since I expect to be in a lower tax bracket after retirement than I am now, why would it be to my advantage to choose a Roth IRA?

      • grandmaguest

        While that might possibly be true, it is an unknown. Depending on your age, that money may sit and earn quite a bit of interest over the years. Would you rather pay taxes on say $1000 now or have that $1000 earn interest/dividends for the next 30 or 40 years (which could amount to a substantial sum) and have to pay taxes on all that it has earned? Also with a regular IRA you are required to start taking a RMD (required minimum) out yearly and pay the taxes on that sum. With a Roth, you pay no taxes on all the money it has earned over the years and are not required to take anything out if you don’t wish to do so. I would try to find out or calculate just exactly how much money you save on your taxes by taking the deduction on a regular IRA. I would be willing to bet it’s not as much as you hoped.
        I never made much money during my earnings years but managed to save enough that I found it, several years before retirement, would have been better to have the money in Roths. I converted as much as I could afford and really kicked myself for not putting it all in Roths in the beginning. I was amazed at how much my money grew over the course of 40 years.
        If you are young, you have many years to decades for that money to grow. It is ultimately up to you to decide. Either way you will pay some taxes on your money……there are calculators out there that can give you a rough estimate of how much (if you consistently put x number of dollars a year in your IRA or Roth) your investment will be worth by the time you retire. Then you can estimate the pros and cons (tax wise) of each type.
        I know there are more articles on this MoneyTalksNews website that can offer you more information on this topic than I can pass along. But guessing that you might be in a lower tax bracket…..unless you are moving from the top to the lowest…..is just that, a guess. And you might be surprised, depending on how much you manage to put into your retirement over the years…..and how much you might be required to withdraw each year from a regular IRA.
        A BIG plus to the Roth as I stated above, is the fact that you could, if needed, pull the original amount (that which you had already paid taxes on) out of the Roth without any tax penalties at any time after 5 years no matter your age. Of course I would suggest you talk with professionals about this….of which I am not. Do your due diligence as I tried to do. I talked to many people and managed to come in contact with some tax consultants along the way and came to my own conclusions that this was certainly the best option for me.
        The fact that you are contemplating these kinds of things bodes well for your future retirement. Good luck and good savings, no matter which you choose.

  • Sandra Murphey

    As an EBay seller, extra funds would come in handy to make some wise buys on discounted or thrift store or garage sale finds, or get free stuff on Freecycle and post on EBay or Craigslist. It’s easy to find out what the best sellers are on EBay. Using money to make money can be a smart move, especially if there’s not a lot of risk involved. Start small, and see how you do. Learn as you go without a big investment. Put aside some of your profits, so you have a stash for future times of opportunity or unexpected losses, or increased expenses.

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