Eagerly awaiting an end-of-year bonus or raise? Cheers! You’re one of the lucky ones. Extra income is always a welcome gift—especially during the holiday season. And yet, while a lump sum of cash can be a boon to your finances, more often than not, it can vanish as quickly as it arrives.
Where does it go? For many people, it seems to be a mystery. In fact, almost no one wants to talk about it—at least not to me! But I get it. I’m known to be a loud advocate of having a strategy for every penny of income. And while my approach may not be nearly as fun as using all of your bonus to splurge on a spur-of-the-moment vacation, the home-improvement project you’ve been dreaming of, or making Santa smile by adding a bunch of extra presents under the Christmas tree, I can pretty much guarantee that spending your treasure wisely will bring much more joy over the long term.
To be sure you make the most of this year’s bonus or raise, avoid these common mistakes:
The takeaway: Before using your extra income to pay down debt, work with your financial advisor to determine the most appropriate option based on your personal financial situation.
“As a general rule, the more immediate satisfaction you get from an action, the more strongly you should question whether it aligns with your long-term goals.”
So true, right? It resonates in a lot of ways, but especially when it comes to spending. Will spending now give you immediate satisfaction? Sure. But I would also guess that whatever you purchase on a whim is probably not aligned with your long-term financial goals.
The takeaway: Consider spending just a chunk of your bonus on a December splurge, and working with your advisor to examine how to invest the rest to address your longer-term goals.
Here’s a great example: Last week, I received a question from a client who had read an article online that suggested opening a Roth IRA for a child and he wanted to know if he should open one for his infant daughter. Thankfully, he checked with a CFP® professional first! What I told him was that a child must have earned income to open a Roth, so his little girl definitely didn’t qualify. (He also wasn’t putting his own retirement planning first, but that’s a whole other can of worms!)
The takeaway: Deciding where to spend or invest your hard-earned bonus requires the guidance of a professional advisor who can guide you based on your big picture.
Now you know what not to do, but what are some wiser options to consider? Here are just a few ideas that are often at the top of the list for our clients. Of course, it’s always best to talk to an advisor who knows every nuance of your finances to choose the option that fits your financial needs and is aligned with your long-term goals:
Bonuses and raises are a great way to close out the year. Just remember that how you spend that gift—no matter how large or small—can make the difference between short-term satisfaction and long-term financial confidence. Talk to your advisor before you spend to be sure you make every dollar count.
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