10 SMART WAYS TO SPEND YOUR BONUS OR TAX REFUND
- Mar 25, 2017
- 4 min read
It’s that time of the year when people are starting to receive lump sums of money in the form of a generous bonus from their employer or a tax refund. According to the Internal Revenue Service’s (IRS) website, the average income tax refund in for 2016 was $3,120.00. On the other hand, bonuses can range from a few hundred dollars to millions for some of Wall Street’s high profile traders or investment bankers. The average Wall Street banker bonus came to slightly more than $138,000 in 2016, according to data from the New York State Comptroller’s Office. The average individual prepares to go on a shopping spree, buy a new car, a vacation, or even buy a yacht in the case of those employed on Wall Street. All of this is usually done without even considering other beneficial options, such as debt elimination, savings, or investments. Remember, your net worth or income doesn’t guarantee the amount of knowledge you possess regarding financial literacy and understanding. Today, I’ve decided to present you with 10 ways to spend this newly acquired cash. These are surely in no particular order of importance, but are a great start to making a decision for the use of your bonus or tax refund.
1. PAY TOWARDS CONSUMER DEBT
There is a small percentage of America that is free of any form of debt. The rest of us are possibly being held captive by high interest and/or long-term consumer debt in the form of credit cards, personal loans, student loans, or car loans. Paying down this debt will increase your net worth and decrease your debt obligations.
2. START AND/OR INCREASE YOUR EMERGENCY FUND
An emergency fund is such a vital component of our financial picture. It’s one of the main components to prevent rekindling a relationship with debt once it is eliminated. Sadly, the first thing most people do when an emergency occurs, such as a car accident, is immediately exercise an option to use debt. A typical emergency is about 3-6 months of your essential living expenses. The 3 month recommendation is for individuals and the 6 month recommendation is for couples. Some recommend 12 months if you are making a big change that will impact your income, such as starting a new business or switching careers.
3. MAKE CONTRIBUTIONS TOWARDS YOUR RETIREMENT ACCOUNTS OR INVESTMENTS
April 18th is the deadline to decrease your 2016 taxable income by contributing to a qualifying retirement account. Your contributions to a qualified 401K or IRA will result in this lowered tax bill. The limit for a 2016 IRA and 401K contribution is $5,500 and $18,000, respectively. This is an excellent option for people who receive bonuses before you file your taxes for 2016.
4. INVEST IN EXECUTING a BUSINESS PLAN YOU CREATED
Many people create entire business plans for a business idea that never happens. A newly acquired lump sum of money is a great time to invest in the business you’ve been itching to start. If executed correctly, the investment from your bonus or tax refund will yield a return for your new business venture and make the risk worth it. Go ahead and JUMP!
5. SAVE FOR A BIG PURCHASE
Make the effort to save this extra cash for a big purchase you’ve had your eye on. This will help you complete the purchase quicker. Also, if you absolutely NEED to use credit for your purchase, utilizing this extra cash for the purchase will decrease your needed debt accumulation.
6. TAKE ADVANTAGE OF TAX FREE CONTRIBUTIONS TO A HEALTH SAVINGS ACCOUNT
Health savings account holders can choose to save up to $3,350 for an individual and $6,750 for a family. These contributions are 100% tax deductible and will surely result in a lower tax bill. This is another great option for those getting bonuses before filing your income taxes.
7. GIVE A PORTION OF IT TO CHARITY
The greatest feeling in the world is to be blessed enough to give extra money away for a great cause. There are so many charities including churches that could benefit from a charitable gift. Charitable gifts are also tax deductible and will decrease your tax bill.
8. INVEST IN YOURSELF (EDUCATION, HEALTH, PERSONAL)
Self-development is such an important goal to maintain throughout our entire lives. For example, the coding class that you have been checking out at your nearest university is calling your name. Now is the time to take advantage of the opportunity. An investment in self is best investment you can make. If you’re at your best, you can bring out the best in others.
9. START A SAVINGS PLAN FOR YOUR CHILDREN’S HIGHER EDUCATION
Higher education has reached the point of being a luxury item these days with how much it costs to obtain a college education. Here are some facts from www.studentloanhero.com about the big problem:
The average class of 2016 graduate has $37,172 in student loan debt, up six percent from last year.
$1.31 trillion in total U.S. student loan debt
44.2 million Americans with student loan debt
Student loan delinquency rate of 11.2%
Average monthly student loan payment (for borrower aged 20 to 30 years): $351
Median monthly student loan payment (for borrower aged 20 to 30 years): $203
10. HAVE FUN!
If you can afford it, have some fun. Many people use their bonuses to go on vacations or even complete a bucket list item, such as skydiving or bungee jumping with friends.
TIPS
DON’T MAKE PLANS FOR A SIMILAR BONUS OR TAX RETURN FOR NEXT YEAR. YOUR 2018 TAX RETURN OR BONUS HAS A HIGH POSSIBILITY OF BEING DIFFERENT.
REALIZE THAT YOUR BONUS WILL BE TAXED BY THE GOVERNMENT.
DON’T SPEND THE MONEY BEFORE YOU GET IT, I.E. PURCHASE SOMETHING ON CREDIT WITH INTENTIONS OF PAYING IT BACK WHEN THE BONUS/TAX RETURN ARRIVES. MORE THAN LIKELY YOU WILL WANT TO KEEP THE MONEY AND YOUR NEW PURCHASE.
IF YOU ARE GETTING A TAX RETURN FROM ONLY SUBMITTING YOUR W2 INCOME, CONSIDER ADJUSTING YOUR ALLOWANCES TO ENSURE YOU’RE RECEIVING ALL YOUR INCOME THROUGHOUT THE YEAR. CONSULT A TAX PROFESSIONAL.
All of us will "make it rain" in one way or another. Where the money falls is where the wise will separate themselves from the others.
Comments