Are you receiving a holiday bonus this year? As tempting as it might be to blow the bonus on a holiday cruise, a smarter strategy is to use the bonus to improve your financial picture instead. Here’s five smart ways to spend your holiday bonus money.
1. Set up an IRA if you don’t have one. Individual Retirement accounts (IRAs) are a tax free savings strategy that can help you prepare for retirement. Since most IRAs require a sizable up front deposit to open, using a large lump sum such as holiday bonus money is a great way to get started on a retirement fund. Not only does putting this money into an IRA get you started on retirement savings, it also will lower your tax liability for the current year.
The one disadvantage to having an IRA is that you can’t tap into the funds until your retirement years, without incurring a large penalty.
2. Pay off high interest bills. Let’s face it, many of us have more debt that we feel comfortable with. One smart financial move is to use that lump sum holiday bonus money to pay down those high interest credit card or cards. This not only improves your credit score but may also eliminate those monthly payments which will free up more cash for day to day living expenses.
The one disadvantage of paying off credit cards with holiday bonus money is that you really don’t have anything tangible to show for that bonus.
3. Put the money towards your mortgage. Those of us with mortgages understand ~ regrettably ~ that the accrued interest on a 30 year home loan is about 3 time higher than the original loan amount. One great way to make that holiday bonus work for you is to put it directly on the mortgage. A $5000 bonus for example, could save up to $15,000 in interest payments over the life of the loan.
Is there a disadvantage to paying off your home early? For those who need the interest write-off, paying down a mortgage quickly might not be desirable.
4. Get started on a Educational Savings Plan. More commonly known as a 529 plan or as a 401K for college, a 529 is an Educational Savings plan that can help you start saving for your children’s college education. 529s come with great income tax breaks since the investment grows tax deferred. Using your Christmas bonus money is a great way to start saving for your children’s future. Here’s a cool site that will explain how a 529 works.
As with every savings plan, there are disadvantages to this plan as well. With the 529, the maintenance fees and administration fees mean lower growth rates for participants. For small savers, a 529 might not be the smartest option.
5. Deposit the holiday bonus in an interest bearing account. Interest bearing and money market savings accounts aren’t paying the best rates right now (less than 1.5% in most instances), but are still a great way of squirreling money away for a rainy day. Financial advisors recommend at least 6 months of income in reserves; your holiday bonus money is a great way to start building up that fund.
The disadvantage with this money saving strategy is the low interest rates.
These are just five ways in which you can spent your holiday bonus money smartly. While none of these involve a new car, a winter vacation, or even a keg of Heineken, these financial strategies will go far in improving your financial picture for the future.