My Bonus Hit My Account. What Should I Do Next?

2021 was a banner year for many companies, especially after several challenging years during Covid. We have seen incentive pay rising across our client base in the first quarter. Like many of our clients, you’re likely wondering about the the most effective use of your cash. Here are some tips from our work with clients:

1) Pay Off Debt:

I like to start with the most appealing topics :) We know – its not sexy. But if you have credit card debt, student loans or other high interest rate debt; reducing those debts should be your first priority. Its unlikely you will earn more than your credit card interest in investment markets long-term. So pay it off an be done!

2) Contribute to Tax-Advantaged Retirement Accounts:

Ensure that you are on-track to max out your 401k match for the year. If not, use your bonus to increase savings inside your 401k plan. The 401k match is the best return you can acheive. Next, work with your tax advisor to consider contributions to IRAs or ROTH IRAs to take advantage of tax deductions. If you act before you filing your taxes, you may be able to deduct contributions for last year (2021) and this year (2022). Once you max out tax-advantaged contributions, then invst the rest in a traditional taxable brokerage account.

3) Make a Plan. Then Invest:

Once you pay down debt and have your investments in the right accounts, its time to invest the rest for the long-term. Just like your business, you should have specific and measurable long-term investment goals. You should also have a target “asset-allocation,” a fancy word for the percentage of stocks and other assets that you own. Your asset allocation should enable you to accomplish those long-term investment goals. You should invest into that investment plan using low-cost ETFs or mutual funds.

Make sure to consider your company stock holdings. If you have vested company stock or options, those holdings should be considered as you build a diversified investment portfolio. We generally recommend diversifying out of company stock as soon as practical given that the performance of your company is already responsible for the bulk of your economic income for a given year.

4) Have a Little Fun:

Ok. Maybe keep 5% and go on a cool trip or whatever else you do that’s fun. This might actually be the most important advice. You are much more likely to do steps 1-3 above if keep a little fun money to the side as well.

If you have questions or would like to discuss how to implement a smart investment plan in detail, feel free to schedule a quick into meeting with us. We would love to better understand your situation and how we can help. Click here to schedule a call.