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What to do with that bonus or raise
How to make the most of your financial ‘jackpot’
It’s a quality problem to have, but if you are in the position of having received a year-end bonus or you are expecting a raise, you may be wondering what you should do with the extra cash. If you find yourself already a month or two into the year and wondering where the extra money went, keep this information in mind for the next time you’re blessed with a financial windfall.
First things first: If you don’t have an emergency fund, this is your top priority. Yes, before investments, and even before paying down debt. A shocking 62% of Americans have less than $1,000 saved for an emergency, and frankly, if you have anything less than three months worth of living expenses, this is where your bonus NEEDS to go. If anything were to happen, say a medical emergency, this cushion could save you from financial ruin.
Okay, if you’ve got that squared away, consider these options and determine what is best for you right now.
Option 1: Invest in your Freedom Fund
Let’s face it, words like ‘budget’ and ‘savings account’ aren’t particularly sexy and don’t usually evoke a passion to allocate our funds accordingly. However, it’s easier to save when you know you are saving with a purpose – to buy your freedom (now, and in the future) from worry and indentured servitude to your bills.
Choosing this option allows you to reach your short-term goals faster. Maybe your goal is to become debt-free this year – now that’s a sense of freedom! Or perhaps the focus of your Freedom Fund is absolute financial freedom, having built the money machine necessary to passively finance your life whether you choose to continue to work or not.
Whatever your goal is, pull that bonus out of your checking account immediately and put it into your savings until you decide how to allocate it, so that you don’t wake up one morning to find that it’s all gone and you received no enjoyment from it.
Option 2: Increase your PYF (the Pay-Yourself-First percentage)
Similar to Option 1, Option 2 focuses on rewarding yourself financially in the future. This strategy is particularly effective for a raise, but works for a bonus too. Save a fixed percentage each pay period (or a fixed percentage of your bonus) and then invest it intelligently. Over time, you’ll start living a life where your money works for you instead of you working for your money.
If you haven’t yet maxed out your 401(k) contributions, particularly if your employer participates in matching funds, this would also be a great way to pay yourself first.
A bonus or raise is the perfect time to implement the Save More Tomorrow strategy, brainchild of Nobel Prize winner Richard Thaler and behavioral economics professor Shlomo Benartzi. Simply put, this technique allows employers to automatically divert 3% of your salary into a retirement account (although you certainly can implement this yourself too!). Because you never received the money, you don’t feel like you’ve lost anything and within a couple of raises you’ll be investing at least the recommended 10% toward your future financial freedom.
Option 3: Allocate your bonus evenly amongst your ‘buckets’
By evenly dividing your bonus evenly amongst your Security Bucket, your Risk/Growth bucket, and your Dream bucket, you are simultaneously investing in your future and creating a jackpot that you can enjoy today. This will stimulate and excite you in ways that will likely cause you to want to earn more, save more and invest even more effectively – because of the rewards today, not just someday in the future. (If you haven’t yet explored the bucket strategy, click the link above.)
Option 4: Put it all in the Dream Bucket
If you’ve taken care of our emergency fund, you carry no bad debt and your retirement fund is in good shape, this option may be for you. Jackpots can help you create more wealth, because the key to creating wealth is to unleash your creativity and find a way to do more for others than anyone else is doing. If you find a way to add more value than anyone else, you can also fund a way to prosper personally.
Finally, whatever option you choose, consider giving a percentage of the bonus to your favorite worthy charity. Not only will you feel great, but also someone else will benefit from your bonus, multiplying the financial blessing. After all, “the secret to living is giving.”