You Got a Bonus - Now What?
It’s finally time! You’ve worked hard all year, put in lots of hours, and now it’s time to receive your much-deserved bonus. While it’s exciting seeing more money in your bank account, have you ever wondered “what do I do with it now?” If you’re like most people, your initial reaction is to splurge! But what if instead of spending the entire bonus, you utilize a portion of it to help set you up to reach your long-term financial goals. There’s a long withstanding rule called the 50/30/20 budget rule. Under this rule you would break your bonus up into different allocations: 50% should be put towards your needs, 30% towards savings and/or debt, 20% towards your wants and desires.
50% Towards Needs
The most obvious and important thing to allocate your bonus to is making sure your bills are being paid and your family’s needs are being met. Needs would include things such as: paying your rent or mortgage, buying groceries, paying for your utilities, and making at least the minimum payments towards your debt obligations. It’s easy to mistake a want for a need, but needs are things you cannot live without.
30% Towards Savings/Debt
Once basic needs are met, a bonus can be used to help accelerate your financial goals. Below are a few ways to spend your bonus that can help set you up for retirement:
- Funding your emergency reserve – Rule of thumb is to have at least 3 months of expenses set aside in case of an emergency
- Paying off high interest debt – It doesn’t make financial sense to invest in an account earning an 8% rate of return when you’re paying 20% interest to a credit card. Paying off debt now will help free up cash flow for other financial goals.
- Save into a retirement vehicle – Invest in something that will help keep your bonus growing! Most common vehicles are workplace retirement plans such as a 401(k), IRA and/or a Roth IRA.
20% Towards Wants/Desires
Life can’t be all about saving, you’ve worked hard for your money and deserve to spend some of it on you! Reward yourself; take 20% of your bonus and set it aside for something you normally wouldn’t buy. Maybe that dream car you’ve been eyeing? Or you could put it towards that trip you’ve been dying to go on.
- Tip – If you’re saving for a vacation, consider setting up a separate account and make that your travel fund. That allows you to spend guilt-free, and your savings account will remain untouched.
Bottom line is that people are notoriously bad at saving. Being intentional with your bonus will not only set you up with a direction for future bonuses but it will take you further on your personal path to financial independence. While you worked hard for your money and deserve to splurge a little, it’s important to consider your future self and start saving towards your long-term goals!