The 6 Do’s And Don’ts For Your Next Bonus

Most top companies provide some type of bonus as part of their compensation package. In fact, 75% of companies gave a year-end holiday bonus in 2016; many of those same companies also provide performance based quarterly and semi-annual bonuses. If you’re one of the lucky ones, then you are faced with a problem that most people would love to have. What to do with all that cash? Your fun friend tells you that you’ve worked hard, and deserve to treat yourself with that brand new boat (this is the same person who tells you sake shots at lunch are a great idea and that you won’t regret that tattoo). The responsible friend will tell you to put 100% away in a market index fund, and not to touch it for 40 years. Well, you should kind of listen to both (but really, you and I both know that you should rarely take advice from your fun friend – you know who I’m talking about).

Most financial professionals will agree on the top priorities to address first: debt, emergency fund and retirement. The most important first step is to make a plan, and allocate accordingly. If you have high credit card debt, perhaps allocate 80% to that, 10% to savings and 10% to fun. If you have no credit card debt but only a few months of emergency funds, you could allocate 50% to emergency fund, 30% to retirement and 20% to fun. There’s no right or wrong; do what’s best for you. While there are many smart ways to use your bonus, there are just as many pitfalls to watch out for. This goes for not just bonuses, but inheritances, jackpots and any other windfalls you may receive.

The DOs:

  • Have a plan. The minute you know the amount of your bonus, determine exactly where it’s going. Very important to do this before it hits your checking account! There’s nothing worse than wondering a month later “where did all that money go?”.
  • Set aside whatever is needed for monthly bills and expenses. Bonuses are often an important part of an employee’s total income and needed for living expenses, so you may need to keep some in your checking account.
  • Reward yourself.  Use 10-20% of your bonus on something fun. You deserve it and it keeps you motivated. Listen to your fun friend just this once.
  • Use your bonus as a motivation. IF you get your bonus, THEN you can go on that vacation or upgrade your car. If you don’t get a bonus, then you don’t get the reward.
  • See a financial planner to get a wholistic assessment of your finances and clarify your priorities and goals.
  • If you have money left after allocating towards debt, emergency fund and retirement, other smart options include:
    • Purchase insurance if needed. SelectQuoteis a great resource to find term insurance.
    • College savings. Vanguardprovides details and comparisons of different types of plans.
    • Mortgage prepayment.
    • Save for goals or big purchases: home, vacation, second home or a new car.

The DON’Ts:

  • Count your chickens before they hatch. Let us not forget the valuable lesson learned from Clark Grizwaldduring one sad Christmas. Don’t put down an advance on the backyard pool yet…your ‘big bonus’ may just be a subscription to the jelly of the month club.
  • Let it sit in your checking account. I promise you will spend it on meaningless things, then wake up in three months and realize your entire bonus was spent on take-out, shoes and parking.
  • Make any extravagant purchases before you have created a game plan. Once you’ve allocated the appropriate money to the most important financial priorities, then you can have fun.
  • Depend on it – it’s not guaranteed income.
  • Keep it in a low interest account. For example, if setting part of your bonus aside for a liquid emergency fund that you don’t want to invest, you can still put it in a bank with a high interest savings account. The Simple Dollarand Bankrate provide several options.
  • Treat it like extra play money. This is real money and part of your income.