Getting a bonus tends to be a great feeling—you worked hard for it, after all. Getting strategic about how you spend your bonus can help it work hard for you. Here are six ways to put your bonus—or any sudden influx of cash—to work.
#1: Pay down high-interest debt
If you have high-interest debt, consider using your bonus to pay down the principal. Doing so can reduce your monthly payments and significantly reduce what you pay in total interest. Pay attention to any debt that charges more than 8% APR (this tends to be unsecured debt, like credit cards).
#2: Max out retirement plan contributions
You might use your bonus to max out pre-tax contributions to your employer-sponsored retirement plan, such as a 401(k), early in the year. If you make regular contributions to your 401(k) from your paycheck, maxing out your pre-tax contribution early in the year may increase your take-home pay going forward.
You could also consider putting funds previously earmarked for a traditional 401(k) toward an after-tax or Roth 401(k) if your employer offers them. For instance, you might use your bonus to help you take advantage of a mega backdoor Roth contribution if your benefits plan meets the criteria.
In 2024, you can contribute up to $23,000 (or $30,500 for those 50 and older) to your traditional or Roth 401(k). Employer contributions don’t count toward that limit. Plus, you can contribute after-tax dollars to your 401(k) if your employer allows. Total contributions, including employer contributions and after-tax contributions, cannot exceed $69,000 in 2024.
#3: Replenish your emergency fund
A bonus can be a great opportunity to revisit and reevaluate your emergency fund. Depending on your circumstances, you may want to have up to six months’ worth of living expenses set aside. Any less than that, and you may not be able to comfortably ride out an extended period of unemployment or afford a costly home repair. More than that, however, and you may be missing out on important opportunities to grow your wealth (like funding your portfolio or retirement accounts). If you have easy access to liquidity, such as a low-interest line of credit, you may not need as much of a buffer. If your emergency fund is in good shape, you may want to put your bonus toward a different goal.
#4: Invest it
Investing your bonus is a great way to ensure you’re making a decision that supports your long-term goals. Adding it to your taxable brokerage account (as opposed to a retirement account) tends to offer more liquidity. This can also help you work toward a bigger future goal, like a vacation home.
#5: Donate to charity
Donating a portion of your bonus to charity can help you accomplish two things—(1) meet your charitable giving goals for the year and (2) help offset your tax liability on the bonus.
Most bonuses are taxed as ordinary income, though employers frequently withhold less than that, which can create a tax surprise. Making a charitable contribution can help reduce any additional tax you may owe.
Keep in mind: Donating cash isn’t as tax effective as donating appreciated stocks or other securities. An advisor can help you assess how a charitable contribution might fit into your overall tax and giving strategy.
#6: Enjoy it
There’s no rule that says you can’t enjoy your bonus—you earned it, after all! The goal is to make sure you use your bonus intentionally. If you want to put your bonus towards a sports car or a boat, for instance, have you thought about depreciation, insurance, storage, and maintenance? An advisor can walk you through potential long-term costs and help you find a balanced way to enjoy your bonus now while still benefiting your future self.
The tips in this article apply beyond bonus season. At Quorum Private Wealth, we recommend clients take a similar approach when receiving any large sum of money, from a bonus to a settlement or inheritance. An advisor can help you take a thoughtful and strategic approach to managing new funds so you can enjoy them without worrying about your future. If you need help incorporating your bonus into your financial plan, schedule time to talk with our team.
