8 smart uses for a year-end bonus
Used wisely, your reward for 12 months of hard work can produce benefits for years to come.
This post comes from Richard Barrington at partner site MoneyRates.com.
If you just received a year-end bonus, congratulations. With money tight and the economy uncertain, those extra dollars can be hard to come by. Now the question is: How do you use that hard-earned bonus wisely?
Here are eight suggestions for getting the most from your year-end bonus:
1. Treat yourself -- within reason.
Splurge. Indulge. That may not be what you were expecting to read in an article on financial advice, but it is very important to get some enjoyment out of your achievements. The important thing is to set limits. Otherwise, your financial windfall may make you feel like you have a license to spend money, which can lead to burning through more than the windfall itself.
Instead, budget a portion of your bonus and reward yourself with some short-term gratification. Then take the rest (ideally, the majority) of that bonus and put it to good long-term use.
2. Pay off credit cards.
While interest rates generally have been falling to record levels, the Federal Reserve reports that rates on outstanding credit card balances recently reached their highest level since 2010, at 13.22%. As a result, using your bonus to pay off a credit card may be one of the most productive moves you can make with it.
3. Get your mortgage above water.
With 30-year mortgage rates now around 3.5%, the only thing that has stopped some people from refinancing is that they still owe more than their homes are worth, due to the decline in housing values. With housing prices starting to recover somewhat, a year-end bonus might make the difference in getting your current mortgage loan above water. That, in turn, could put you in position to take advantage of some of the lowest mortgage rates on record by refinancing.
Look at this as the best of both worlds: You get to spend the money by putting it toward your home's equity, but you still get some ongoing benefit from that money in the form of interest savings.
4. Max out your retirement contributions.
If you haven't reached the contribution limits on tax-deferred plans such as an employer-sponsored 401k or a traditional IRA, then putting your bonus into one of those plans can have multiple benefits: You can defer paying taxes on the amount contributed, build your retirement savings and compound those savings with future investment earnings.
If your employer makes 401k matching contributions, you might even be able to boost the effective size of your bonus by qualifying for that matching money.
5. Start a college savings fund.
If funding a college education is in your future -- whether for yourself, your spouse or a dependent -- then contributing to a tax-advantaged college savings program such as a 529 plan might be a good use for your bonus. According to figures from The Economist, U.S. college tuition in 2010 represented 38% of the median U.S. annual compensation. For most people, that's too heavy a load to bear all at once, so some advance savings can make paying for education much more manageable.
Not only that, but a 529 plan can allow you to take a tax deduction now and pay no tax on distributions from the plan later on -- as long as the money is used for qualified education expenses.
6. Rebalance your portfolio.
As your goals, income and gains or losses change, your investment portfolio needs to be readjusted periodically. Rather than having to force security sales to make these adjustments, the most efficient way to rebalance a portfolio is to do it when introducing new money into the program.
7. Get a better savings account rate.
If you are putting some of your bonus into a savings account, take the opportunity to ensure that your account is offering a competitive yield. Be sure to shop for the best rates before you settle on a new savings account, and be aware that making a larger deposit might qualify you for higher rates.
8. Eliminate checking account fees.
Free checking accounts are getting harder to find, but banks generally will waive checking account fees if you meet a minimum balance requirement. The money from your year-end bonus might beef up your account enough to meet that threshold, and those savings could amount to more than you would earn in interest on the same amount of money.
A year-end bonus is your reward for 12 months of hard work. If you put that bonus to work wisely, you could see it continue to reward you over the next 12 months -- and beyond.
More from MoneyRates.com and MSN Money:
I quit my 100K a year job and opened a food truck 2 years ago, best move I ever did. More money and no B/S
All of that with my one-year subscription to the jelly of the month club??
Copyright © 2013 Microsoft. All rights reserved.
ABOUT SMART SPENDING
Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.
Having worked as a writer, reporter and editor for more than 25 years, Editor Julie Tilsner is the sort of person who can't help but correct grammar in Facebook postings and on billboards. She's written for BusinessWeek, the Los Angeles Times, Parenting, Redbook, AOL and others. She lives in Los Angeles County with her family and loves to drink wine and practice yoga, although not generally at the same time.
A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.
Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
Marilyn Lewis is an award-winning writer with a passion for getting readers clear, straight information that helps them stay out of financial trouble. A former reporter for The San Jose Mercury News, she works from her home in Port Townsend, Wash. Contact her at MarilynLewis@Outlook.com.
LATEST BLOG POSTS
Sounds too good to be true . . . but by using these extreme tactics, it's possible to save big at the pump.