6 Ways to Use your Year-End Bonus by Scott Montgomery, CLU, ChFC
Congratulations to the countless American workers who received year-end bonuses from their employers in 2016. Before heading out on a shopping spree, however, individuals should consider the following suggestions for putting those extra dollars to work for them in the future.
- Maximize Retirement Savings. Workers with access to an employer’s 401(k) retirement plan should consider maxing out their contributions, if they have not already done so through payroll deferrals. For 2016, the maximum amount individuals can contribute to a 401(k) is $18,000, or $24,000 for individuals and 50 and older. Compound interest on these contributions combined with an employer match could mean a significant cushion for one’s future retirement. In addition, many individuals can qualify to increase their nest egg by funding an Individual Retirement Account (IRA) before the April 15, 2017, tax deadline.
- Create an Emergency Fund. The future is uncertain. Rather than being unprepared for a costly medical bill, house repair or loss of a job, individuals should have a stash of cash to cover three to six months of living expenses. These funds should be kept liquid, in a savings account, that is not affected by the equity markets nor subject to any tax or early withdrawal penalties, which is the case with investment and retirement accounts.
- Plan for a Child’s Future Education. The cost of a college education continues to rise, adding to the nation’s $1.3 trillion student loan debt problem. With some advance planning, however, Americans can lighten their future education costs by contributing to a 529 college savings plan. These plans can provide an immediate tax deduction on the contributions as well as tax-free withdrawals in the future, as long as the money is used for “qualifying education expenses,” such as tuition, books, room and board. Resident of Florida have the added benefit of participating in the state’s prepaid college program and lock in today’s costs for a child’s future education. For the 2016-2017 enrollment period, which runs through February 28 , 2017, Florida residents can begin paying as little as $47 a month to cover one year of a child’s future tuition.
- Make an Excess Premium Contribution to a Permanent Life Insurance Policy. Because a permanent life insurance policy acts just like an investment, overfunding the policy with an additional premium payment can yield positive returns.
- Pay off Credit Card Debt. According to personal-finance website WalletHub, the average amount Americans will owe on their credit cards at the end of 2016 is a whopping $8,500. When considering that the average interest rate on credit card balances is 16 percent, it behooves individuals to apply their year-end bonuses to pay down outstanding credit card balances.
- Pay Off a Home Equity Line of Credit. A home equity line of credit (HELOC) works like a credit card in that it allows homeowners to borrow money from the bank and make affordable interest-only repayments over a pre-determined period of time (draw period) before making a dent in the principle amount borrowed. During the draw period, however, the interest rates on the HELOC can fluctuate causing wide swings in payments from month to month. Moreover, the lender has the ability to close the line of credit at any time, leaving the homeowner on the hook for the full amount. Paying off a HELOC can provide homeowners with peace of mind and the ability to allocate their savings to more beneficial sources.
- Treat Yourself (within Reason). A year-end bonus represents the hard work and long hours a worker put into his or her job during the previous 12 months. Subsequently, it makes sense that an individual should seek instant gratification and reward themselves with a treat, whether it be a vacation, a new car or new shoes. However, individuals should plan and budget properly to ensure they do not leave themselves in a poorer financial position than they were before receiving the bonus.
About the Author: Scott Montgomery, CLU, ChFC, is a director with Provenance Wealth Advisors, an independent financial planning services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (800) 737-8804 or email email@example.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Scott Montgomery is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. Financial advisors of Raymond James Financial Services are not qualified to render advice on tax or legal matters.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.
Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk, and you may incur a profit or loss regardless of strategy selected.