Have you recently received a bonus or are anticipating getting one in the coming months? Before you blindly spend your bonus, take a moment to reflect on how you can better utilize this supplemental income to support your short and long-term financial goals.
To help you get the most out of your hard-earned money, our team has identified five ways to help you maximize the potential of your bonus through a financial planning lens.
1. Increase Retirement Contributions
Use your bonus as an opportunity to increase contributions to your 401(k) or individual retirement account (IRA). If you are still early in your career, consider increasing your 401(k) contributions by a small percentage every year until you reach the maximum contribution amount. Additionally, if you have not already maxed out your 401(k), talk with your employer to see if you can contribute a lump sum from your bonus into your retirement savings.
There have been changes to contribution limits in 2022. For employees under the age of 50, you can now contribute up to $20,500 per year to your 401(k). For those age 50 and older, you can contribute an extra $6,500 per year in catch-up contributions, for a total of $27,000 for the year.
2. Invest in a Health Savings Account (HSA)
If you have a high-deductible health insurance plan, be sure to take advantage of the ability to make contributions to your health savings account (HSA). One of the benefits of making contributions to an HSA is that these funds are yours to keep and can be used for qualifying medical expenses, tax-free.
“For our clients who have an HSA, we like to encourage them to save money and invest the balance,” said Jennifer Barry, CFP®, a Managing Advisor at Connecticut Wealth Management (CTWM). “However, instead of accessing these funds now, pay current medical bills from your existing cash flow in order to allow the HSA account to grow and accumulate for future healthcare needs in retirement.”
It is important to be mindful of HSA contribution limits: $3,650 per year for individuals, $7,300 per year for family coverage, and an extra $1,000 catch-up contribution for those 55 and older.
3. Pay It Forward
Another way to put your bonus to good use is to pay it forward. Not only is donating money to charity proven to increase happiness, but it is also a great way to pass on values to the next generation.
Before using a portion of your bonus for a charitable donation, check with your employer to see if they have a corporate gift matching program. This is becoming a popular trend for larger corporations and will further benefit your nonprofit of choice.
4. Reward Your Hard Work
Life is short, so it is important that we remember to reward ourselves and enjoy the fruits of our labor. After implementing the above strategies aimed at helping to maximize your bonus, take time to reflect on what else is important to you.
Have you ever dreamed about owning a second home to escape the cold New England winters? Or perhaps you have always wanted to take a big family vacation to another country. Use this opportunity to save a portion of your bonus towards future financial goals.
Additionally, if you have kids or grandchildren, consider putting away money for education expenses. The cost of college continues to skyrocket, and a little bit can go a long way when it comes to student loan debt. Look into opening a 529 college savings plan with your state so your money can grow tax-free. A financial advisor can help you navigate the potential tax advantages of these types of plans.
5. Diversify Your Portfolio
Additionally, if your bonus is in the form of stock awards that are part of an executive compensation plan, be sure to talk with a financial advisor about how you can diversify your investment portfolio versus holding stock in just one company. To learn more about executive compensation plan benefits, watch our recent video.
A Worry-Free Retirement
While it is important to reward yourself, acting on these five strategies can help to ensure that today’s bonus fuels a worry-free retirement and your long-term financial goals.
If you want to discuss this further with one of our financial advisors, please contact us at 860-470-0290 or by filling out the contact form.