Employers are gearing up to spread some holiday cheer. According to a survey by Accounting Principals, three-quarters of human resources managers say their firm will be giving out year-end cash bonuses, compared with 67 percent last year.
Even better, the average payout is expected to hit nearly $1,100, a 25 percent increase from 2015. Nearly one in three employers intends to pay bonuses of more than $1,000.
If you're in line for a cash bonus, an inheritance, or an unanticipated windfall, some advance planning can ensure you leverage it to serve your financial goals.
That includes "spending some of it on fun," says Skip Johnson, a founding partner of the Minnesota advisory firm Great Waters Financial. "If I tell a client who receives a $10,000 bonus to sock it all away for retirement, they are going to have a hard time following that advice. We're all human."
Johnson recommends dividing a cash bonus into three buckets: Fun. Giving. Saving. "Spending 15 percent to 20 percent on fun can make it easier to stick to a plan that uses the rest for other goals."
The key is to making the most of the remaining funds so that it isn't just sitting in a checking account.
"It just becomes money in your pocket that gets spent," says Gregory Hammer, of Hammer Financial Group, in Schererville, Ind. "You want to have a plan for how you will utilize your windfall to serve your long-term goals."
Pay down high-rate credit card debt. Even a small balance on a credit card that charges 15 percent or more is a financial sinkhole. "There is no investment that can match the guaranteed return you get from eliminating high-rate debt," says Hammer. Using a bonus to get rid of card debt has an enduring impact. "You can then redirect the money that was being used to pay off the debt toward another financial goal," says Hammer.
Top off your cash stash. Having at least three months of living expenses set aside in an emergency fund is the standard goal, but bulking up to a six-month emergency cash reserve delivers even greater peace of mind.
Pay down installment debt. Making extra payments on a car loan or student loan puts you that much closer to the day you will be debt free. The sooner that happens, the sooner you will have more income to put toward other financial goals, such as saving for retirement, a down payment, or a child's education fund.
Put the maximum into your retirement savings. In 2017 individuals younger than 50 can contribute $18,000 to a 401(k) and $5,500 to an IRA. Anyone at least 50 years old can sock away $24,000 in a 401(k) and $6,000 in an IRA.
Chip away at your mortgage. Assuming you have ample cash reserves and retirement savings, consider accelerating your mortgage payoff. "I have never met anyone who is mad their home is paid off before retirement," says Johnson. Making even one extra payment a year can shave years off your loan term. Be sure to direct your loan servicer that your extra payment is to be applied to your principal only.
Upgrade efficiently. If you've been itching to replace the fridge or water heater, or have been contemplating a new roof or windows, focusing on energy efficiency can be good for your pocket book, and the environment.
