Getting a windfall in the form of a bonus, inheritance, tax return or settlement can be exciting! Before you even get the money in your hands, you may already be fantasizing about how wonderful life could be with this extra money.
However, before you book that trip to Paris or pick out a new wardrobe, take a moment to think of how you might be able to use that money to improve your life. Using a large sum of money to get ahead is a great use of extra funds.
Morgan Ranstrom is a financial planner at Trailhead Planners. He believes you can use your bonus however you choose, but it should be used to reach goals that matter to you, “There are a whole host of things you can do with your bonus, and ultimately, where you allocate the cash should align with your overall financial goals.”
Save It Toward a Goal
Putting your extra money away for savings isn’t a bad idea. You may have a big goal that you’ll need money for, like a vacation, wedding or down payment on a home. You might have kids who’ll be entering college at some point in the future.
No matter your goal, it’s a good idea to put money away for that expense. You’ll take advantage of compound interest over time and avoid the temptation to inadvertently spend it on something trivial!
Pad Your Emergency Fund
The one constant about unexpected expenses is that they will always come up! So, it’s a good idea to have an emergency fund for life’s little surprises you can’t always plan for.
An emergency fund can also keep you from going into debt. If you don’t want to depend on a credit card for unexpected expenses, an emergency fund can help alleviate that.
Whether you’re starting or adding to an emergency fund, you can’t go wrong with building it up so it’s there for you when you need it most.
Whether you have an employee-sponsored retirement plan or not, it can be a good idea to invest in stocks.
Investments in non-tax advantaged accounts aren’t as illiquid as those in a retirement account, meaning you can cash out on shares without the penalties of cashing out, say a 401k.
For this reason, investing in stocks or even bonds could be a good place to put your money, especially if you’ve got shorter-term savings goals that you need to meet before retirement.
Fund a Business Venture
Starting or funding a business venture is another form of investing in your future. You may already have a hobby that could become a profitable venture. What would a nice cash injection mean for your business?
Even if you don’t yet have a business, you could use your bonus money to get one going. The plus here is that you may be able to offset some personal tax liability or even use pre-tax money to cover expenses you’d usually cover with after-tax money.
Then, of course, there’s the potential to earn extra income. With all these benefits, it could be worth taking a risk and putting your extra income to work in a business.
Pay Down Debt
Paying down debt that’s costing you precious money due to interest charges can help you make huge strides in your finances. What you’d pay in future interest costs is money you could be using to save or invest in your future.
If you think it could be difficult for you to gain a toehold on your debt, then paying extra on your balances could give a much-needed boost toward debt freedom. It might not be the most glamorous thing to do with a bonus, but it could be worth it for the peace of mind.
Improve Your Home
Another form of investing is improving the home you live in. There are a number of home improvement projects that can increase your home’s value.
You could use your bonus to totally fund the project or offset a portion of the costs. If your goal is to avoid debt in this process, cash can help contain the cost of your renovation efforts by potentially decreasing the interest factor.
Invest in Yourself
Clint Haynes, CPA and founder of NextGen Wealth, says to not be shy about investing in yourself. “Taking a yoga class or getting a gym membership is a good investment in your health.”
He goes on to state that anything that broadens your horizons can also be beneficial. “I’ve seen people invest in themselves through online courses or local community college courses,” he says.
Haynes recognizes that it’s perfectly fine to invest in things that will improve well-being in areas like health and personal development.
If you’re having trouble choosing what to do with your bonus, you could choose more than one option. You don’t have to spend your entire bonus on just one thing – you could spread the wealth!
You also have the option of putting the money away in a savings account and choosing how to spend it at a later time. Either way, being intentional on spending your bonus wisely can help you figure out what’s best.
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