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February 4, 2025
Key Takeaways
If you’ve received a sizeable bonus or other financial windfall, there are plenty of smart ways to leverage it. Before we delve into them, however, let’s acknowledge that not every financial decision is made with one’s head. “While it’s wise to save and invest most of your bonus, allocate 10 – 15% to reward yourself for your hard work,” suggests Kim Curtis, CFP, AEP, CAP, ChFC, CLU, MSFS.
Once you’ve treated yourself, what should you do next? Alec Broughton, CFP, FBS, suggests organizing the possible uses for the funds in a hierarchy from immediate to short- and long-term needs, as we have done here. “After you’ve taken care of your immediate needs, evaluate any near-term goals, like funding an upcoming purchase, charitable giving, or paying down debt. Once these near-term goals are satisfied, turn your attention to long-term goals and investment strategy.”
“Sizeable cash bonuses can often lead to under-withholding for tax liabilities,” cautions Justin Murphy, CFP. “Before you make other plans, determine if you’ll have a tax bill for the prior year or need to make estimated payments for the current year. At Cerity Partners, we provide tax projections to help clients identify the prior year’s tax bill and any estimated payments. That way, you always know how much net cash is available for your goals.”
Murphy notes that interest rates are still high, so if you have a business loan, mortgage, or other high-interest debt, applying your bonus to pay it down can help you save considerably over time. For the same reason, if you’re planning a significant purchase, like a vacation home, you can save by putting more money down as cash and financing as little as possible.
A change of circumstance can happen anytime, whether it’s a natural disaster, illness, or unemployment. Jorge Salazar, CFP advises, “Ensure you have three–six months’ worth of living expenses in a liquid, high-yield savings account.” If you’re a business owner, Curtis suggests holding a year’s worth of expenses in your emergency fund to cover any business-related expenses.
Your employer’s workplace benefits might be a tax-efficient way to grow your wealth. Curtis says, “If eligible, contribute to an HSA for a combination of tax benefits and long-term healthcare savings.” And Murphy suggests, “Ask your advisor whether you should max out your 401(K), IRA, and deferred compensation arrangements.”
“A sizable bonus creates an excellent opportunity to review the current investment allocation and strategically fill in areas where you may be under-allocated,” says Broughton. “With the recent run up in U.S. Large Cap Stocks, this is an opportunity to keep your asset allocation in line with building up Small/Mid Cap asset classes as well as international exposure. At Cerity Partners, we also look to see if there are any gaps in our allocation. This includes considering private market additions to the portfolio to add non-correlated assets and further diversification.”
“Direct proceeds to a side business that creates passive income,” Curtis suggests. Examples include developing an app, buying rental property, selling collectibles online, peer-to-peer lending, and more.
Your bonus might make it easier to share your good fortune, but don’t use it to fund a charitable donation. “Look for appreciated securities that you’ve held for a year or longer first,” Murphy says, “then backfill your investment portfolio with cash. You might want to consider establishing a donor-advised fund for a tax-efficient way to meet your charitable giving goals.”
“Consider keeping some cash on the side to pay tuition, fund a 529 college savings plan, or establish an education trust,” Murphy advises. Alternatively, use your bonus to fund a risk management strategy, buying life insurance, annuities, or a long-term care policy.
Curtis suggests taking an even longer view: “Use the proceeds to complete or update your estate planning documents with a trust, will, or other estate planning essentials.”
According to Curtis, “Certifications, advanced degrees, or skills training that could advance your career and earnings potential are an excellent way to leverage your bonus. You can also invest in your personal growth. Take classes or pursue a hobby, learn to play golf or guitar, speak a foreign language, or get your scuba diving certification.”
The success you’ve earned should amount to more than money. If you’d like financial guidance to help you realize your goals, please contact us. We’d be honored to help.
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