7 things to do with your end of year bonus
The job market continues to improve and many employers are right now considering whether to give their employees and end of year bonus. According to a survey by SurePayroll, 64 percent of small businesses will be giving a year-end bonus to their workers this year. That number is up from 52 percent in 2014.
So if you are lucky enough to find yourself getting a bonus this year, the next question is what to do with it.
Step 1. Pay down credit card debt
If you have credit card debt, paying it off should be the first thing on your list of financial to do’s. And with the Federal Reserve set to begin raising interest rates, paying down credit card debt now will save you a lot of money. Paying credit card debt is one of the best investments you can make. Where else will you get a 15% to 25% return on your money?
Step 2. Build emergency savings
Once you’ve paid off your credit card debt, the next thing you should look to is building up your emergency fund. We’ve talked a lot about emergency funds in the past, read up on how to get started here.
According to Bankrate, nearly half of Americans don’t have enough money saved to cover three months of expenses. And 28 percent of people have no emergency savings at all.
Step 3. Max out your retirement contribution
If you haven’t maxed out on your retirement account contributions, you should strongly consider using year end bonus money to do that. Your contributions to your 401k or a traditional IRA are all pre-tax meaning that putting your bonus into one of these plans can have a few benefits. First, you defer paying taxes on the amount contributed. Second, you build your retirement savings and compound those savings with future investment earnings. And three, if your employer matches your 401k matching contributions, you’re actually increasing the size of that bonus.
Step 4. Stop paying checking account fees
If your current checking account charges you a monthly fee, the first thing you should do is shop around for a free checking account. Many banks will give you free checking if you sign up for direct deposit. However, if changing banks isn’t an option then consider using your bonus to meet your banks minimum balance requirements for free checking.
Step 5. Get yourself a better interest rate on your savings account
Many banks offer higher interest rates for having higher account balances. See if your newfound savings money can get you into a higher interest tier at your bank. And if not, look around for another bank with higher interest rates.
Step 6. Start saving a down payment
Homeownership has decreased since the great recession, and while there is a lot debate over whether buying a home is a wise financial decision, owning a home is still the cornerstone of the American Dream. And if buying a home is part of your American Dream then you will to start saving for what will be a pretty hefty downpayment. You will want to consider the expected timing of your home purchase. If you are relatively close to buying a home then you will want to keep your down payment funds in a safe liquid savings vehicle like a savings account or money market account. However, if you don’t plan to buy a home for several years you may want to consider investing some of your down payment savings in a way that might earn you some returns on your money like index funds or cheap mutual funds.
Step 7. Start a college savings account
If you have kids then saving for college is something you need to start thinking about how to pay for college. Using a 529 college savings plan has many benefits including the fact that it allows you to take a tax deduction now and pay no tax on distributions from the plan later on so long as the money is used for qualified education expenses.
