Use year-end bonus (or gift) wisely
As 2019 draws to a close, you may be anticipating – or have already received – a year-end bonus from your employer. Or you might be receiving a substantial cash gift for the holidays. (If you’re really lucky, you might get both.) You can doubtlessly think of many ways to spend this money right now, but how can you use it to help yourself in the long run?
Here are a few suggestions:
• Pay off some debts. Virtually all of us carry some type of debt, and that’s not necessarily a bad thing. For example, your mortgage not only gives you a place to live and a chance to build equity in your home, but the interest payments are typically tax deductible. Other debts, though, such as those on consumer items, are not so positive – you generally can’t deduct the interest payments, and the items themselves probably won’t enhance your personal wealth. Plus, the bigger your monthly debt payments, the less you’ll have to invest for your future. So, you might want to use your bonus or monetary gift to pay off, or at least pay down, some of your less productive debts.
• Start an emergency fund. If you were to face a large, unexpected expense, such as the need for a new furnace or a major car repair, how would you pay for it? If you didn’t have the cash on hand, you might be forced to dip in to your long-term investments, such as your stocks and mutual funds. A much better option is to build an emergency fund, containing six to 12 months’ worth of living expenses, with the money kept in a liquid, low-risk account. It will take time to build such a fund, of course, but your year-end bonus or gift money could give you a good start.
• Contribute to your IRA. You can put in up to $6,000 to your IRA, or $7,000 if you’re 50 or older. And although you’ve got until April 15, 2020, to fully fund your IRA for the 2019 tax year, you still might want to put your “extra” money into your account right away. If you wait, you’ll probably find other uses for this money. And if you’re going to enjoy a comfortable retirement, you’ll need to maximize every possible resource – and your IRA is one of your best ones. Furthermore, the sooner you get the money into your IRA, the more potential it will have to grow over time.
• Feed your college fund. If you’re already contributing to a college fund for your young children or grandchildren, you can use your year-end bonus or monetary gift to add to the fund. If you haven’t already started such an account, you might want to use this money for that purpose. You could open a 529 plan, which provides possible tax benefits and gives you control of the funds until it’s time for them to be used for college or some type of vocational school. (Depending on where you live, you might also get tax benefits from your state if you use a 529 savings plan to pay for K-12 expenses.)
To achieve all your financial goals, you’ll need to take advantage of your opportunities – and your year-end bonus or monetary gift can certainly be one of them.
This article was written by Edward Jones for use by your local financial advisor, David Whitlock. Member SIPC.