How to Maximize Your Bonus or Raise / by Paco de Leon

So you got a bonus or raise? Right on. It’s tempting to think of this money as extra cash, especially if you got a bonus. The name itself implies extra. But before you get any fancy ideas about how to spend it, let’s talk about how you can maximize your financial windfall.

 

1. Emergency Fund

If you don’t have an emergency fund, this should be your first priority. Yes, first priority, ahead of paying down your debt or investing. According to a recent survey, 69% of Americans have less than $1,000 in savings - a baffling and alarming statistic since the textbook definition of an emergency fund is at least three months of worth of your living expenses. If you’re in this camp, you absolutely need to put your bonus straight into your emergency fund; do not pass go, do not collect $200.

 

2. Pay yourself more

The general rule of thumb for retirement savings is 10% of your income. If you haven’t started yet and you got a 3% raise, it would be virtuous of you to go ahead and divert that additional income into your retirement account; either your employer sponsored plan or an individual retirement account.

The best way to implement this is to set it up so you’re funding your retirement plan automatically. This is especially easy if you can participate in an employer-sponsored 401(k)  or equivalent. Since the extra cash never hits your account, you don’t feel like you’ve lost out on anything. And if you continue on with this habit within a couple of raises you’ll be hitting the 10% goal.

 

3. Make a dent in your debt

If you’ve got credit card or other high-interest debt, it may be wise to pay a large chunk off or increase the amount you pay each month in order to get out of debt sooner and spend less on the amount of interest you’re paying.

Make a larger dent in your debt by making extra payments or a payment to pay down the principal. This will lower your balance and can also add up to a significant reduction of interest in the long run.

 

 

4. Invest

If you have goals that require a big chunk of change, like buying a house or starting your own business and you have time, start investing now. The more time you have to invest, the more time your money has to grow and to ride the ups and downs of the market.

 

5. Recalibrate your budget

We can always find areas in our budget where we’d like to spend more money. If you’ve been on a war-time budget mode, it might make sense to spread extra cash across some budget items. Be careful though. It’s easy to increase your expenses as you increase your income. Make sure your spending is in line with your overall goals and not just a shot of instant gratification.

 

6. Give back

Finally, whatever option you choose, consider donating some funds to a worthy charity.  You’ll feel great, help others and possibly receive a tax deduction.