Have a Plan for Your Year-End Bonus? It's a Good Idea to Plan Now

Your bonus is coming! Why not have a plan for it way in advance — in October? If you make a plan for that money ahead of time, you might...

By Melissa Brock

Depositphotos.com contributor/Depositphotos.com - MarketBeat

This story originally appeared on MarketBeat

You know it's coming and you can hardly wait for it to get here, so what's the best thing you can do with your year-end bonus?

You may want to consider how you should use it long before it arrives in your bank account. Since your year-end bonus often coincides with the holiday season, it's possible that the money has always gone straight toward holiday gifts.

If you make a plan for that money ahead of time, you might find other (better) ways you'd like to apply it.

Reasons to Make a Plan for Your Bonus Ahead of Time

Why might you want to make a plan for your bonus before the money lands in your bank account?

Reason 1: You can make arrangements ahead of time.

Let's say you plan to put your bonus money into your 401(k). If you must let your employer know or fill out some paperwork, you can have that neatly filled out ahead of time. That way, you won't scramble to access the documents you need at the last minute.

Reason 2: You and your family members can agree on how to use the bonus.

You might prefer to save the money but your spouse might have other ideas. Maybe she's planning for a new furniture set or new outdoor patio decor. It's a good idea to have a conversation so you and your family members can all get on the same page about what makes the most sense for your collective needs.

Reason 3: It gives you time to talk to a financial advisor.

Whenever you come into a sum of money, why not work with a financial advisor to discuss where you should place it? You probably have so many goals and buckets: college savings, retirement savings, vacations and more, so making a plan ahead of time gives you the opportunity to have a financial professional help you sort out your goals. You may be more likely to carry out your original intentions (and not change your mind) if your financial advisor suggests that you should invest for retirement instead of, say, buying a boat.

Great Ideas: How to Use Your Year-End Bonus

Need a little help determining how you'll use your year-end bonus, particularly if you don't want to spend it? Let's walk through a few suggestions and alternative uses for this welcome chunk of change.

Suggestion 1: Add some muscle to your 401(k).

Does your 401(k) look kind of puny? Consider chucking your entire bonus toward your 401(k) without a backward glance. If you're not consistently saving at least 10% of your income each year, you could be headed for retirement trouble, according to experts. If you can save even more than 10% every year, you're in a great spot financially. Use your bonus as the kindling to get the roaring fire going — your older, wiser self will thank you for it.

Suggestion 2: Pay off debt.

If you're already clicking along in the retirement savings department, ask yourself about your debt situation. Do you have credit card debt? Student loan debt? Debt from a personal loan? Some types of debt have higher interest rates, may impact your credit score and may have more devastating effects on your finances. If you have high-interest debt, you may want to seriously consider tackling it with your year-end bonus.

Suggestion 3: Put your bonus into an emergency fund.

If you don't already have an emergency fund put into place, you may want to use this opportunity to do so. Experts recommend putting at least three months' worth of income into an emergency fund. If you want to get even more ambitious, consider putting in six months' worth of emergency fund money into an emergency fund. You can consider putting it into a savings account, money market fund or other liquid, low-risk account.

Suggestion 4: Save for college.

This one might cause even the most dedicated parent to grit her teeth. "You mean, put my hard-earned bonus money into a fund for college? Really?" However, it's a possibility, especially if you have yet-to-realize goals for college savings for your kids. It can feel really good to pour money into college savings instead of buying holiday gifts that will sit in your child's closet (though your kids might not agree with this approach).

Suggestion 5: Invest in other retirement vehicles.

If your 401(k) doesn't dazzle you, you may want to consider wrapping your year-end bonus into other types of retirement plans, such as an individual retirement account (IRA) or a Roth IRA. These retirement vehicles may give you broader access to an asset allocation that you prefer (which you might not be able to access to with your 401(k). By choosing your broker, you can also cut down on fees and other roadblocks that you might face with your company's 401(k).

Suggestion 6: Tackle other savings goals.

Does your spouse's van look like it could crumble into a pile of rusty dust at any moment? You might need to set up a new car fund. If you think you might want to take a tropical vacation sometime soon, you may want to put your bonus toward your Hawaii fund. Whatever your "other" savings goals, consider outlining them and making sure everyone in your family is on board.

Suggestion 7: Invest in you or your spouse.

Has your spouse always had dreams of running her own business (and you fully believe she can pull it off) or developing her own side hustle? She might need some seed money to get started or some education to make it happen.

Get a Plan for Your Bonus

You may feel paralyzed by indecision when it comes to your bonus. After you take a look at this list of options, you might want to piece together a combination of a couple of these options. For example, you may want to save for college and kick money into your retirement fund. Good opportunities are endless — just make sure you don't make the decision at the last minute.

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