After many years of school, I now have my first job and I expect to receive a year-end bonus somewhere between $5,000 and $10,000. What should I do with my bonus check? What kind of saving options do I have? (I will already have maxed out my 401k.) –Angie
Congrats on getting year-end bonus check this holiday season. Not everybody’s employers engage in the once-expected tradition of dispensing Christmas bonus checks or a year-end bonus for a job well done.
Treat your bonus like a paycheck, not a jackpot
When you get a year-end bonus, the first thing to do is try to see it as another paycheck, not a sudden windfall. Because bonuses comes all at once, we’re apt to view it as a windfall rather than earned income, making us more likely to spend it, according to a 2006 study by University of Chicago Professor Nicholas Epley and colleagues.
That’s not to say you can’t spend some of a year-end bonus on something that makes you happy; after all, the extra money does come at a “shoppy” time of year. But if you’re savvy, you’ll have a plan for saving the majority of your Christmas bonus check even before you receive it. The plan will make it that much easier to cash the check, set aside an amount you want to spend, and quickly sweep the remainder towards your designated savings goals.
Make a plan and prioritize
Without knowing your entire financial situation, it’s hard to give a definite recommendation, so I will follow my 6 1/2 steps. You’ve done a great job by maxing out your 401(k) this year, but there may be other good places to use your bonus.
The obvious target is any credit card debt, if you have it.
My second recommendation would be to save the remainder as a cash emergency fund equal to six months of monthly expenses. Although unglamorous, the best place for this money is in a safe and liquid online savings account.
With credit cards paid off and six months expenses in the bank, you’ve got options. If your annual income falls below the limits, you might consider putting $5,000 into a Roth IRA. Otherwise, it’s time to invest or save the money for your chosen goals: Travel, your next home, a new car, your wedding, starting a business, or whatever other dreams you have.
Choose higher-yielding investments for longer-term goals
Depending on when you need that money, you have options as to where to put it, but to get any chance or earning a decent return on your money, you’ll want to invest, rather than save, in stocks, bonds or even real estate.
Betterment provides a way to invest in stocks and bonds that’s as simple as opening a savings account. For trading stocks, bonds, and mutual funds, you can get started at any of these brokers. Finally, these five mutual funds are good options to begin investing on your own.
What about you? What do you do with your bonus check?