Receiving a decent raise or bonus can help enhance your financial position for the current year if you put the money to good use. Here are some ideas for putting your bonus or your raise to good use.
Pay down debt
If you have significant debt, it might make sense to direct a portion of your raise or of your year-end bonus towards reducing that debt. This is especially true if that debt carries a high interest rate such as with many credit cards or consumer loans.
In case of a raise, allocate a portion of each paycheck towards paying a bit extra towards your debt. This can help retire the debt sooner than by just making the minimum required payments and can help save on interest payments over time.
In the case of a bonus payment, you might consider taking all or a portion of the bonus to pay down debt. This will help your credit score and improve your personal balance sheet. You will save money by eliminating future interest payments. You can then take the money you have saved and use it to invest, buy a house or for any number of other purposes.
Increase retirement account contributions
Another good use for your raise or bonus is to increase contributions to a retirement account like a 401(k) or an IRA.
In the case of a raise, this is a good opportunity to direct some or all of the extra money in your paycheck as contributions to your employer’s 401(k) or similar workplace retirement plan like a 403(b). This is always a good idea, but especially so if your employer matches your contributions to a certain level and you are not already contributing enough to receive the full amount of the match.
Beyond this, increasing your contributions builds up your retirement nest egg to help you achieve a comfortable retirement. In the case of a traditional 401(k), the contributions are made on a pre-tax basis which helps at tax time.
With a bonus paid in a lump-sum, you might look at contributing to an IRA account and/or using the money to increase your 401(k) or other workplace retirement contributions. In this case you might set aside the money to offset the extra funds deducted from your paycheck, if needed, throughout the year.
Add to your emergency fund
Things happen in life and it’s important to have a liquid emergency fund to fall back on in the case of a financial emergency. This might be a job loss, high medical bills due to an illness, expensive car repairs, damage to your home or countless other major expenses that are not covered by insurance or other means.
Most financial experts suggest having at least six months’ worth of your normal, basic expenses in a liquid place like a savings or money market account.
Ensuring that your emergency fund is sufficient can be an excellent use for some or all of a bonus payment. You add to an existing emergency fund account or start one if needed. With a raise you can direct a certain amount of each paycheck towards your emergency fund. Hopefully you will not need to use this money, but you want to be sure it’s there for you and your family if needed.
Contribute to a 529 plan
If you have children or grandchildren, a 529 plan can be a great way to help fund their college education. With a bonus you can take some or all of it to start a new 529 plan or add to an existing plan. With a raise, taking a portion of your increased salary and directing it to a 529 plan account can be a solid way to fund the plan over time.
A 529 plan grows tax free and tax-free withdrawals can be made for qualified education expenses such as tuition, books as well as room and board. Beyond college expenses, 529 funds can be used for non-college programs such as trade schools. Under the Tax Cuts and Jobs Act the money can also be used for educational expenses for grades K-12 in some cases.
Money left over in a beneficiary’s account can be transferred to other family members or be used to pay student loan debt. Under the recent Secure 2.0 legislation, up to $35,000 can be directed to a Roth IRA for the beneficiary.
If you have received a raise or a year-end bonus, contact your Wedbush financial advisor to discuss the best ways to put this money to use for you and your family’s future.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.