It’s a new year, and what better time to take a positive step towards improving your finances? Enter the year-end bonus. Many companies, particularly larger ones, pay these in January or February. So, if you’re due a bonus…what are you going to do with it?
First things first. If you tithe, then by all means tithe. If you don’t, giving away a portion of that bonus to your place of worship or favorite charity is always a productive option. Now that you’ve done that, let’s take care of you. These recommendations are in a specific order. If you’ve already achieved one or it doesn’t apply, simply move on to the next one.
1. Pay Off Debts
This is the most boring answer, but it’s also very often the most beneficial.
If you have any kind of credit card, auto, or other non-home debt, PAY IT OFF! The best time to lessen what you already owe is when you have money in your pocket. If you only have mortgage debt, paying that down can also make sense much of the time.
2. Add to (or start) a Savings Account
Another boring solution, right? Three months from now when your heat-pump keels over, you’ll be prepared. I recommend building your cash savings account to roughly nine months’ living expenses to prepare you for the unexpected.
3. Add to (or start) an IRA
If you’re eligible (see link below) Roth IRAs are the rock stars of retirement accounts. Traditional IRAs have their advantages, too. When you’re trying to decide between the two, talk with your financial advisor as well as your tax preparer. Contribution limits to these accounts are $5,500 per year if you’re under 50 or $6,500 if you’re 50 or older. For a great run-down of the advantages and limits of IRAs, visit the IRS’s website at:
https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1
4. Fund a Non-Retirement Investment Account
Maxed out your IRA? Make too much money to contribute to an IRA?
Don’t fear. Start a regular (non-retirement) investment savings account.
I get asked all the time, “How do we invest outside of our retirement accounts?” The answer is simple: it’s called a taxable brokerage account. You can set up one yourself at any number of popular online institutions, or you can have a professional do it for you. You won’t get the tax benefits that you get with retirement accounts but that shouldn’t stop you from saving this way!
Think of this as a means to save towards your long-term future goals like that beach house or retirement cabin.
Let’s take a break before we get to idea number 5. If you’ve fulfilled numbers one through four then sincere congratulations are in order! You’ve taken important steps towards improving your financial well-being. Now you can splurge. You have my permission. Enjoy that trip you’ve been wanting to take or treat your family to a nice dinner out. On to idea number five:
5. Give it Away
You’ve paid off your debts. You have an emergency savings account. You’ve fully funded your retirement accounts, and you’ve built up a taxable investment account. You may have even splurged a little with a weekend trip. You’ve done well. Who can you help? The recent November/December 2016 issue of Lynchburg Living highlights 25 incredible nonprofits in Central Virginia. That’s a great place to start.
Yes, it’s fun to take that entire year-end bonus and go on a shopping spree, but it’s a new year and time for new thinking. Tackling your finances this way will pay off for years to come, not just on shopping day.
Disclaimer: This article is generalized in nature and should not be considered personalized financial, legal, or tax advice. All information and ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
By John N. Hall, CFP®
