7 responsible ways to use your holiday bonus
Posted
Dec 18 2007, 09:11 AM
by
Karen Datko
Rating:
This post comes from partner blog Blueprint for Financial Prosperity.
Earlier I wrote about seven irresponsible and fun ways to spend your holiday bonus, and now I’m going to throw a bone to the responsible crowd and list seven responsible things to do with your holiday bonus. I think everyone is a mix between the two (or at least I am). If you spend your entire bonus on fun things, you aren’t saving enough for the future. If you do responsible things with your bonus, you aren’t really enjoying the fruits of your labor. I think you need to find a nice happy medium without going overboard in either direction.
Eliminate debt. Are you carrying high-interest credit card debt? Before you spend any of that bonus, put it toward your debt. Before you save for your retirement, pay down your debt. Paying down a credit card debt at 19.99% is like earning 19.99% on an investment (not exactly, but you get the idea), so pay down that credit card debt as soon as possible. Before you can build your personal-finance house, you need to firm up your foundation by getting rid of your debt.
Pump up that Roth IRA. You have until April 15 to make a contribution for 2007. Using your holiday bonus toward this is a great opportunity to save for your retirement. If you haven’t put anything in your Roth until now, I recommend that you revisit your retirement savings strategy for next year and put away a little each month. You may not get a bonus (or as much of a bonus) next year, so waiting for it to arrive before making a contribution is risky. If you’ve contributed for this year, consider saving your bonus and contributing it for 2008. By making the contribution as early as possible, you let your money grow as long as possible.
Bolster your emergency fund. Do you have three to six or 12 months of expenses saved in your emergency fund? If not, you should consider saving part of your holiday bonus in a high-yield savings account for a rainy day. An emergency fund is a crucial part of your overall savings picture. It allows you to weather emergencies in your life without digging a debt hole that you have to climb out of. I keep enough to cover four months, but that’s because we have two incomes. I recommend at least six months if you have only one income.
Consider a home-renovation project. Now is a great time to consider a home-renovation project if you own your home. They are great because you get the benefit of the renovation plus the potential increase in home equity. Not all renovations are created equal. Adding a bedroom or bathroom will increase the value of your home by nearly the cost of adding them; putting on a sunroom isn’t as valuable. This year is the last year to get a tax credit for making energy-saving home improvements.
Make another mortgage payment. If you own your home, consider paying down a little extra principal this month. You'll accelerate your amortization schedule, which is front loaded with a lot of interest that benefits no one but the bank. By making an additional payment, you can shave years off your loan and save yourself significant money on the back end. For example, on a $300,000 30-year loan at 6.25% interest, you normally would pay about $365,000 in interest over 30 years. If you make a one-time payment of $1,000 -- say you started repaying the loan in January and make that extra payment in December -- you would reduce the total interest paid by more than $5,000.
Predict your potential needs and save. Try to predict any large capital expenses you might encounter next year. For example, our 20-year-old water heater may need to be replaced next year, so we’ve planned ahead and saved enough. An emergency fund is great for emergencies you can’t see coming, but if you think you’ll need some funds for a specific reason, save that money in a separate fund.
Go on a vacation. That’s right, the seventh responsible idea for spending your bonus is to go on a vacation. Why? You need to be rewarded for a year’s worth of hard worth and great performance (or at least performance good enough to warrant a bonus). Your employer saw fit to reward you for your hard work, so far be it from me to advise you not to reward yourself for that work. Enjoy yourself, and send me a postcard.
Other articles of interest at Blueprint for Financial Prosperity:
"7 irresponsible and fun ways to spend your holiday bonus"
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Consolidating Citi credit card accounts"
"Credit cards with 0% interest on purchases"
