Now that Halloween is wrapped up and the end of the year approaches, things will start to get busy for most of us. If a year-end bonus falls into your lap, what would you do with it?
One principle of behavioral finance is that we tend to follow through on plans we’ve made for money, before it is received. In other words, if you anticipate a potential windfall now, and create a strategy to put the money to good use, you’re less likely to give in to impulse spending and miss out on a valuable opportunity.
So, what are some smart moves to make with a year-end bonus?
Pay down debt. The amount of money that many of us are losing, through credit card interest, is staggering. For example, let’s assume you’re carrying 3,000 dollars in credit card debt, at an interest rate of 15 percent. That means you’re paying 36 dollars per month in interest. If your minimum payments are set at 60 dollars, and you pay only the minimum each month, it will take you sixteen years to pay off that 3,000 dollar debt. At the end of that time, you will have forked over 3,641 dollars in interest … Meaning, your 3,000 dollars of purchases actually cost you 6,641 dollars.
While it’s not very exciting, the best thing you can do with a windfall might be to reduce your debt.
Max out retirement plan contributions. Assuming you don’t need to pay down debt, another smart plan for a windfall would be to max out your retirement plan contributions for the year. If you have a 401k, check your statement. Have you contributed the maximum of $18,500 this year? If you’re over 50, have you reached the $6,000 catch-up contribution limit?
For IRAs, the contribution limit is $5,500, or $6,500 if you’re age 50 or older.
Stash it for a rainy day. Let’s say you’re one of the lucky people, who don’t carry credit card debt and you’ve maxed out your retirement plan contributions for the year. Stashing your year-end bonus in a savings account can provide a cushion for any emergencies you might experience throughout the year. That way, you might never fall into the credit card debt trap!
For more information on financial planning, give us a call. We can help you decide how to put a windfall to its best use, according to your needs and priorities.