If you’re a hard-working professional, receiving a bonus is the ultimate form of recognition. Everyone loves a little bit of extra cash, but figuring out what to do with your windfall isn’t always easy.
Many people are tempted to blow their work bonuses by making a purchase they would usually skip. However, if you want to adopt a saver’s mentality, that’s the last thing you should do.
A bonus can be a powerful financial vehicle and one that shouldn’t be squandered on something frivolous. If you want to make your work bonus work for you, here are a few things that a saver would do with the windfall.
Savers Bolster Their Emergency Funds
If you don’t have a solid emergency fund, a bonus to a great way to increase its balance. While the exact amount you need in this form of savings account may vary, it should at least be able to cover certain costs.
For example, practically everyone’s auto, home, or renter’s insurance has a deductible. Your emergency fund should be able to cover those expenses, even if they all strike at once. Medical deductibles are another cost that should be in an emergency fund, along with a bit extra to cover surprise expenses, like a major appliance going out.
Some experts even advise having three to six months of living expenses stored in an emergency fund, along with cash to cover the costs above. This gives you a substantial buffer against larger emergencies, like sudden unemployment, which can be a lifesaver in a crisis.
Use Work Bonuses for Retirement
If you aren’t already maxing out your retirement savings, then put your work bonuses into a retirement account. Many companies allow employees to direct their bonuses to their 401(k) or similar vehicle, either in part or in whole.
Alternatively, you can put the money into a Traditional or Roth IRA, as long as your annual total contribution falls below the maximum.
Investing Work Bonuses
If your emergency fund and retirement account are squared away, then you can also save your work bonuses by investing. This lets you build a portfolio that is separate from your retirement, which can be incredibly handy.
Most investment portfolios aren’t subject to the same withdrawal restrictions that as retirement accounts. This means you can use these funds when the need arises, though fees can certainly apply.
Boost 529 College Savings Plans
If you or a family member will be going to college in the future, then consider sending your work bonuses to a 529 College Savings Plan. These work similar to investments, allowing your money to grow over time, but have designs that operate with college expenses in mind. Plus, these come with tax benefits that can reduce how much you owe.
Pay Down High-Interest Debt
If you’re battling with high-interest debt, then using your work bonuses to pay these down results in a savings. Since your balance it lower, you’ll pay less total interest, saving you money in the long run.
Yes, it isn’t the same as saving the money. But, if your savings and investment vehicles pay you less in interest than you are paying someone else, it does result in a net gain.
Ultimately, saving your work bonuses instead of spending them is a smart move, so resist the urge to blow that windfall and make it work for you instead.
Looking for more great articles from Engineer Your Finances? Here are a few to check out:
- 7 Simple Retirement Savings Hacks
- Savings Hack: Forgo Spending One Day a Week
- How Much Interest Does 1 Million Dollars Earn Per Year?