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5 Ways to Spend a Bonus or Financial Windfall

Receiving a workplace bonus or other type of financial windfall can feel like Christmas morning. Regardless of whether you receive a few hundred dollars or a few thousand dollars or more, your thoughts will probably quickly start turning to what you can do with the money.

For many people, the first thought is to treat themselves by going out and making some sort of purchase they wouldn’t normally make. It’s often smarter, however, to think strategically about how you can use the money.

There are a number of strategic things you can do with a bonus or other financial windfall to help meet big-picture financial goals. Here are 5 ideas to consider:

1. Invest the money for a long-term goal. Two of the most common long-term investing goals are retirement and education. The good news is that the federal government offers tax-advantaged investment vehicles that can help you accomplish both goals.

The most popular retirement savings vehicles for many people are IRAs and 401(k) plans. In 2022 you and your spouse can each contribute up to $6,000 to separate IRAs, or $7,000 if you’re 50 years of age or over. The 401(k) contribution limit is even higher: up to $20,500 this year, or $27,000 if you’re 50 years of age or over.

The most popular education savings vehicle for many people is a 529 account. Contribution limits vary by state —for example, you can contribute to a Missouri 529 plan until the combined balance in your accounts reaches $325,000.

2. Save the money for a short-term goal. Many people today take out a car loan to finance the purchase of a vehicle. But wouldn’t it be nice if you could buy your next vehicle in cash? This would save interest expense and remove a potentially large line item from your monthly budget. To this end, you could use your bonus to start a new car savings account and add money to the account on a regular basis, perhaps saving enough to buy your next vehicle debt-free.

Similarly, many people take out home equity loans to finance home improvement projects. Instead, you could use your bonus to start a home improvement savings account so you can tackle your next project without incurring any debt.

3. Start or build an emergency savings fund. Also known as a “rainy day” savings fund, this is an account that you can tap if you’re ever faced with a major unexpected expense — like a home or car repair or medical bill — or if you lose your job and are unemployed for a period of time. Without an emergency savings fund, you might have to use high-interest debt to pay for unexpected expenses like these.

Every family’s situation is different, but one rule of thumb is to save up between three and six months’ worth of living expenses in your emergency fund. It’s usually a good idea to keep the funds in a no-fee, high-yield savings or money market account with a bank or online financial institution. This way, the money will be accessible at any time without penalty if you need it.

4. Pay down high-interest consumer debt. Excessive debt can hinder you from meeting important financial goals like balancing your budget or saving for retirement or college. This is especially true for credit cards, most of which charge double-digit interest rates on outstanding balances.

If you’re carrying high balances on one or more credit cards, consider using your bonus to pay down some or all of this debt. Doing so could yield not only financial benefits but there are also emotional benefits associated with getting out of debt.

5. Splurge a little! So you’ve devoted a portion of your bonus or windfall to things like investing, saving or paying off debt. Now it might be OK to splurge a little bit and spend some of the money on something that you will enjoy.

For example, maybe you and your spouse have been dreaming of taking an exotic overseas vacation. Or maybe you’ve been eyeing up a cool new big-screen TV or home entertainment system. It can be fun to use a portion of your bonus or windfall on things like this that will bring you and your family personal enjoyment. And you can do so guilt-free if you also use some of it for more “responsible” uses like those discussed here.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.