Ruth Mahoney, President, Capital Region, Keybank
By Ruth Mahoney, President, Capital Region, KeyBank
According to a recent survey by Accounting Principals, 75 percent of companies plan to give out bonuses this year, up from 67 percent in 2015. The average amount is also increasing, from $858 to $1,081. On the surface, this seems great, but your bonus most likely comes at the expense of a meaningful raise, which should change the way you think about spending it.
End-of-year bonuses and financial gifts should be treated like a mini financial windfall. Before spending it on the next iPhone upgrade, larger television or trip to the tropics, stop and think about how this bonus can make an impact. Not just now, but also in the future.
Consider the following steps before spending your bonus:
Options for spending your end-of-year bonus or financial gift
Let’s be honest. Not all bonuses are created equal. Take stock of your unique financial situation and determine your individual needs. Then, and only then, determine how you would like to use your bonus. Because regardless of the amount, large or small, it can still be used for impact. The following ideas can help.
Instead, budget a portion of your bonus and reward yourself with some short-term gratification. Then take the rest of that bonus and put it to good long-term use. A $2,500 investment at 4 percent in 10 years will be worth more than $3,700. That same $2,500 each year, still earning 4 percent, adds up to a whopping $31,000 after 10 years. That’s more than $6,000 in free money—a bonus on top of your bonus… because who doesn’t like free money?
Ruth Mahoney is president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected] This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice.
What you shouldn’t do with your end-of-year bonus
Once you know you are receiving an end-of-year bonus or gift, it’s easy to start spending the money before it is even in your hand, let alone your bank account. But just as it is important to take the time to consider a plan for how to spend your bonus, it is equally as important to understand the options that you should avoid. Here are a few no-no’s when it comes to spending your financial gift this year:
- Don’t spend your bonus until you physically have the cash deposited into your account. You may have been told you would receive a certain percentage, but if that isn’t the case, spending too quickly can leave you with more debt than you started with.
- Don’t splurge on expensive gifts for friends and family. Hopefully you had a plan for holiday shopping before receiving the bonus this year. Stick to that plan and buy budget-appropriate gifts your family will enjoy. It’s the thought that counts, not how much you spend.
- Avoid racking up credit card debt with plans to pay it all off. After taxes, that amount might be lower than you thought it would be. Your bonus will be taxed like regular income, so even if you’ve been told how much your bonus is, don’t assume you know exactly how much will land in your account.
- Don’t pay extra on your mortgage. Most likely, your mortgage has a low interest rate and is a tax-deductible debt. While paying down a mortgage will save you on future interest, at today’s low mortgage interest rates, the savings is modest, and the benefit is further reduced by the tax deduction.
- Don’t include this year’s bonus in your financial plan for next year. You can’t assume you will receive the same bonus next year, so don’t plan your finances for the year ahead around that extra income.
And don’t expect that your bonus will last longer than it most likely will. Set at least some of the money aside—into a savings account—until you have a concrete plan on what you are going to do with it.