The Eliot Rose Blog
What To Do With Your Year-End Bonus?
Added 12/29/2016 by Jason Siperstein, CFA, CFP
The simple answer is don’t spend it all! Of course you should treat yourself to some enjoyment from your hard work, but the majority of it should be invested.
Now a couple quick caveats… If you have credit-card debt, tackle this before you even think about investments. The average interest rate in the U.S. on a credit card is about 15%. So if you’re upset you’re not investing, try to view it as “earning” 15% just from paying off your balance. In essence, that is exactly what you are doing!
Next, you will want to think about creating an emergency cash reserve or a freedom account. These accounts contain just cash or cash equivalents. You want this type of flexibility if an emergency were to happen. By having this liquidity, you avoid racking up credit card debt and/or invading investments at a potentially suboptimal time.
If you don’t have credit card debt and already have adequate liquidity, there is no better thing to do than invest your bonus. You should do this consistently! Let’s throw some numbers out there…If you receive a $5,000 bonus every year for 20 years and invest it, this should appreciate to roughly $230,000. If you earn a bonus of $20,000, you’ll end up just shy of $1,000,000.
Some of the biggest mistakes I’ve seen regarding bonuses is (1) people spending too much of it and (2) putting it in a savings account instead of the stock market! Don’t make these easily avoidable mistakes and have a wonderful and prosperous 2017!!