Most companies pay out bonuses around this time of the year, especially if you work in the financial services world. As a result, many people are seeing (or are about to see)a surge in their bank account balance and they are trying to figure out what to do with their cash surplus before they end up blowing it on something extravagant and unnecessary. I have always been a good saver but at the same time I have spoiled myself now and again with fabulous trips and great clothes. Somehow though I managed to do something right along the way as I was able to save up enough money for a downpayment to purchase my own apartment back in 2000 and then in 2007 Darren and I bought our own home.
If you are looking for some advice on what to do with your bonus so you don’t spend all of it and have nothing to show for it down the road, here are some of my tips that have helped me build up some equity through the years.
1. First off, pay off any outstanding debt. There is nothing worse than paying high interest rates on credit cards, notes or other owed balances. Clear these up and live within your means. Pay your credit card bills monthly and do not carry over balances. If you can’t afford it, don’t buy it!
2. If your company offers a 401K plan, contribute a portion of your bonus to it. Many companies allow you to contribute up to 20% of your bonus before taxes. This is a great way to save for the future. These contributions add up over time. The maximum contribution for 2008 is $15,500 but whatever you can contribute you should. You can, and should contribute to a 401K or Roth IRA from your weekly paycheck too until you max out or contribute the amount you feel you can afford and still live within your means. Even if you can only contribute 2-3% from your check, I recommend it.
3. Build a savings cushion of three months of living expenses. You should always have an ‘emergency’ fund to go to if you need it. Life happens, and you may need to dip into this fund if something significant arises. I’d suggest setting this ‘emergency’ fund up as a money market or short-term bond fund where the money is not as accessible as a regular savings account. Also, interest rates are a little higher and the ability to make a withdrawal from these types of accounts require more effort than a regular savings account.
4. Set a long-term goal for yourself. Do you want to buy a house or apartment? A car? Take a great two vacation to an exotic location? If so, start thinking about long term investments. If your ‘emergency’ savings exceed what you need to live off for three months, put your excess cash in mutual funds, bonds or securities with a solid company that you intend to hold on to for a long period of time. In 5, 10, 15 years the dividends on these kinds of investments pay off.
5. Treat yourself every now and again to something special. Whether it be a pair of Jimmy Choo shoes, a full day at a luxury spa or that ‘must have’ bag you’ve had your eye on – its okay to splurge every once in awhile – just be sure you slurge within your means.