Summer is a great season. We spend more time outside, take a vacation, or just cut out from work a little early, perhaps to enjoy a local concert or meet friends on the beach. Summer is also when many bonuses are distributed. If you got one, congratulations!
Do yourself a favor and first consider taking up to 25% of your mid-year bonus and spend it on you and your family. You worked hard and deserve to enjoy the fruits of your labor.
Consider these 7 ways to spend your summer bonus to help accomplish your financial goals.
1 Put Your Bonus Back Into The Business
The best use of your mid-year bonus may simply be to re-invest in your business. Review your business plan (you do have one right?) and determine where you can put a few dollars to work. In most cases our client’s money is invested in new technology, marketing, or human capital.
2 Pay Down Student Loans
You may choose to pay down your student loan. Many clients ask us if it is better to pay down student loan debt faster or invest extra dollars in the stock market. There is no question that over a longer period of time you may be able to do better investing extra cash as opposed to saving on the student loan interest. This depends on the interest rate that your lender charges you. If you can get a higher return than the interest you are being charged, it may make sense. Our cash flow modeling, available to all of our clients on their personal website, is a great tool that we use to help our clients make this decision.
3 Increase your retirement plan contributions
Now is a good time to calculate just how much you are saving in your 401(k) retirement account and if you should contribute more. People under 50 can save a maximum of $19,000 from their paycheck in 2019. If you are over age 50 in 2019, you can save a total of $25,000. Since we are halfway through the calendar year, look at where you are and adjust your contributions. Consider contributing to your Roth 40(k) account which may provide tax-free income during retirement.
4 Fund Emergency Reserves
Most financial planners recommend 3 to 6 months of expenses be held in cash for emergency purposes. That is a lot of cash on the sideline. Our customized financial plans consider access to lines of credit and liquid investments to help determine the proper emergency reserve amount. If you have access to a line of credit or other assets that can be easily converted into cash without penalty (within 3 days), then we recommend no more than 2 months of expenses to be held in cash as an emergency reserve. Ensure that you have the proper amount of reserves and then deploy the rest of your bonus in other areas to help you reach your goals instead of making the banks richer.
5 Fund a 529 college savings plan
A 529 college savings plan allows you to set aside dollars that can grow tax-free if used to pay for higher education qualified expenses. A recent change in the laws also allows you to use up to $10,000 per year for private high school tuition. We almost always recommend that law firms and other businesses set up an employer-sponsored college savings plan. In Virginia you can purchase a 529 plan with no upfront or back-end sales charges using the employer sponsored share class. This could potentially save you thousands in fees. This design does not increase overhead and is simply a way to pass along a savings to all employees.
6 Fund your Flexible Spending Account
Many employers offer a healthcare flexible spending account. Adjust your future paychecks and fund this account with pre-tax dollars which also will save you on taxes. FSAs cover a variety of healthcare products and services, from acupuncture and physical therapy to vaccines. The best use of the benefit is to pay for any deductibles and co-payments, but you cannot use the funds to pay premiums.
You can put up to $2,650 of tax-free money into this account in 2019, according to the IRS. Note that you must spend the money saved in an FSA by the end of the year.
7 Fund Your HSA Account
Another health-related benefit you may be able to use is a health savings account (HSA). Many high deductible health plans (HDHP) include this valuable pre-tax benefit. Again, you may want to adjust your future paychecks to fund this account. The contribution limits are higher than FSAs. You can save up to $3,500 for an individual or up to $7,000 for a family. If you are older than age 55 you may also contribute an additional $1,000. The contributions are tax-deductible, the earnings inside the account grow tax-free, and distributions may also be tax-free if used for qualifying medical expenses. Most HSA providers now include access to investment accounts so you can grow this money for future medical expenses.
If you need help deciding what to do with your bonus, give us a call and we will be glad to brainstorm for a few minutes with you or set up a quick cash flow model to help you make a better decision so you can reach your financial goals.
Envision Wealth Management is a marketing name for registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. We do not give tax or legal advice. CRN-2665968-080119
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