Monday, 30 September 2019

If you're like many hard-working Americans, you eagerly anticipate the extra financial boost you get from either your quarterly or year-end bonuses.

In fact, thanks to several years of consistent economic growth, a whopping 83 percent of American workers expect to receive a bonus at the end of 2019 and more than 50 percent believe it will be larger than their 2018 bonus.

Whether it's larger or not, you've probably already come up with dozens of ways to spend your bonus. Maybe splurge on the holidays or plan a nice trip for the spring. Maybe even buy a new flat-screen TV or the latest smartphone.

While you certainly deserve a reward for a year of hard work, you could opt to spend part of your bonus to treat yourself while making some very smart financial moves with some of your extra cash, too. Here are some options you might want to consider:

Pay down debt

Paying down debt is not nearly as fun as a new flat-screen TV, but it's very smart. If you have balances on your credit cards, that's the debt you want to pay off first because credit card interest rates are typically higher than rates on other types of debt. Whether it's a year-end bonus or some other windfall, using any extra cash to knock out credit card debt should always be a priority.

If you don't have credit card debt, the next debt-reduction target would be any installment or unsecured loans, as those types of loans also have higher interest rates than secured loans like auto and home loans.

If your only debt is a car loan or mortgage, you might want to consider making an extra payment or two on your mortgage if they will be credited against your principal. A few extra payments might not sound like they'd make much of a difference, but paying off your mortgage even a little bit earlier than the original term could save you a lot of money.

Build an emergency fund

Another excellent way to use your bonus is to build an emergency fund. Many financial experts recommend having enough cash on hand to cover three months of living expenses in case you lose your job or face some other type of emergency.

Saving three months of living expenses can be challenging for a lot of people, but tucking your bonus away for a rainy day could be a good start.

Start saving for retirement

Have you started saving for retirement yet? Almost all financial experts agree you should start saving for retirement as soon as you possibly can. If you are participating in an employer-sponsored plan, you might be able to make a special one-time contribution and add some or all of your bonus to your account. If your employer doesn't offer a retirement savings plan, consider opening an Individual Retirement Account (IRA).

In addition to kick starting your retirement savings, the deposits you make into your IRA could save you money on your income taxes, too. However, you can't access the money until you reach retirement age without incurring a hefty penalty.

Start saving for a specific goal

If you have all of your other financial bases covered — paying off debt, building an emergency fund and saving for retirement — you could start saving for some specific goal such as a down payment on a house, home improvements or college tuition.

Whether you have a specific savings goal or not, your bonus presents an excellent opportunity for you to use your money to make more money. And there are several, low-risk ways you can do this.

  • Money Market Account – A Money Market account is a good way to earn more interest than with a regular savings account and still have access to your money if you need it.
  • Certificate of Deposit (CD) — With a CD, you could earn even more interest, but your money will be tied up for a pre-determined period of time, which is called a term. CD terms can range from 12 months to several years.
  • Education Savings Plan — These plans, commonly referred to as 529 plans, allow you to earn interest on a tax-free basis and use the funds for a wide variety of education-related expenses. Starting a 529 plan when your children are young can help you maximize your earnings and be better prepared when those college tuition bills start rolling in.

Be smart and have a little fun

Again, depending on the size of your bonus, you can always choose to use part of it for debt reduction or saving and keep a little out for a modest reward. But, think about it this way: there is a chance you might regret splurging, but almost zero chance you'll ever regret paying off debt or saving.

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