My Bonus Hit My Account - What Should I Do Next? (2023 Update)

April is often the time when your bonus from last year will be paid out. This is likely the largest cash and stock infusion you will have throughout the year, and we get lots of questions about what to do 1st, 2nd 3rd etc.. And, by the way, we think its OK to have a little fun with your bonus money because we think having a little fun will help you make better long-term decisions. Below, we will discuss the four things you need to do with your bonus money to set yourself up for long-term success.

1) PAY OFF DEBT:

I like to start with the most appealing topics. We know it’s 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. It’s unlikely you will earn more than your credit card interest in investment markets long-term. So pay it off and 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 achieve. Next, work with your tax advisor to consider contributions to IRAs or ROTH IRAs to take advantage of tax deductions. Once you max out tax-advantaged contributions, then invest 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, it’s 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.

If you receive corporate stock, you likely receive grants each year as part of your bonus. Each year, prior year grants vest and you decide what action to take; either with intention or passively by doing nothing. Generally, the first thing to consider is how much exposure you have to your employer. Their future success drives your salary, your cash bonus and any stock or option awards you receive. If the company doesn’t do as well, not only will your shares go down in value, but your salary and bonus may not rise. Thus you have a lot of economic exposure to your employer. Generally, it makes sense to diversify as quickly as is possible in a tax-efficient manner. What that looks like is different for everyone depending on the types of stock grants you own and your other assets. If you have assets like real estate or other depreciable assets that can help offset the income, you may be able to use those to help mitigate the tax hit from share vesting. This requires a holistic view of your tax situation. We recommend speaking with a professional to optimize tax efficiency related to stock based compensation.  

4) HAVE A LITTLE FUN:

Lastly, keep 5-10% and go on a cool trip or whatever else you do that’s fun. This might actually be the most important advice. You work hard and you should enjoy the fruits of your labor. Also, you are much more likely to do steps 1-3 above if keep a little fun money to the side as well.