What to Do With a Large Bonus or Influx of Cash

Have you ever wondered what to do with a large bonus? Depending on when your employer’s compensation review cycle ends, you may find yourself asking this question from time to time. Receiving a large amount of money is an exciting event, whether it’s an annual windfall or an unexpected reward for your hard work. However, there are a few considerations before you treat yo’self to a shopping spree.

Shall we review?

Establish a Solid Cash Reserve

The first and most critical step is ensuring an adequate cash reserve. A robust emergency fund is essential for financial stability and peace of mind. It should ideally cover three to six months’ worth of living expenses.

Why is it important to do this with your large bonus?

• Unexpected Expenses: Life is unpredictable. Medical emergencies, job changes, or major home repairs can arise without warning.
• Investment Cushion: Having a cash reserve means you won’t need to dip into your investments during a market downturn, allowing your investments to recover and grow over time.

Assess Upcoming Projects or Large Purchases

Next, consider any significant expenses on the horizon. This might include home renovations, a new vehicle (whether you decide to lease or buy), or other substantial investments. Planning for these expenses is essential rather than allowing them to become financial surprises. And as a bonus, you just got one! You know what to do… 

Ask yourself these questions:

• Home Projects: Are there any planned renovations or maintenance tasks that could require a substantial outlay?
• Major Purchases: Are you considering buying a new home or car in the near future?
• Education Costs: Do you have children approaching college or an increased private school tuition payment, and have you factored in those costs?

Planning for these expenses ensures you are not caught off guard and can allocate your bonus accordingly.

Maximize Retirement Contributions

Maximizing retirement contributions should be a high priority for any high-earning individual (and yes, this includes our tech employee clients). Tax-advantaged retirement accounts such as 401(k)s, IRAs, or Roth IRAs offer significant benefits.

Steps to consider:

• 401(k) Contributions: Ensure you are contributing enough to get the full employer match, if available. Consider maxing out your contributions up to the IRS limit.
• Backdoor Roth IRA: If your income exceeds the limits for contributing directly to a Roth IRA, a backdoor Roth IRA might be a viable option.
• Catch-Up Contributions: If you are 50 or older, take advantage of catch-up contributions to bolster your retirement savings.

Investing Beyond Retirement Accounts

Once you have a solid cash reserve and are on track with your retirement contributions, consider investing in taxable accounts. These accounts offer flexibility and the potential for growth beyond your retirement savings. (Talk to your financial advisor about this one!).

Investment options:

• Brokerage Accounts: Platforms like Schwab, Fidelity, or Vanguard offer a variety of investment options, including stocks, bonds, mutual funds, and ETFs.
• Consult Your Advisor: Working with a financial advisor can help tailor your investment strategy to your specific goals and risk tolerance.
• Diversification: Ensure your portfolio is diversified to spread risk across different asset classes and sectors.

Treat Yo’self (Reasonably)

While it’s crucial to be prudent with your bonus, it’s also important to enjoy the fruits of your labor. Allocate a portion of your bonus to treat yourself and your loved ones.

Ideas for treating yourself if you don’t know what to do with your bonus:

• Vacation: Plan a memorable trip to recharge and spend quality time with family or friends.
• Luxury Purchase: Consider a luxury item you’ve been eyeing, such as a new gadget, piece of art, or designer item.
• Experiences: Invest in experiences that bring joy and fulfillment, such as concert tickets, fine dining, or a spa day.

What to do: Make Strategic Moves With Your Large Bonus

Receiving a large bonus is an opportunity to strengthen your financial foundation and invest in your future. By establishing a cash reserve, planning for large purchases, maximizing retirement contributions, and investing wisely, you can ensure your bonus works for you in the long term. 

By following these steps, you can make the most of your bonus and continue to build a secure and prosperous financial future. Speaking with your financial advisor can also help you determine where to direct your funds. And don’t forget to set aside a portion to enjoy the moment – after all, you’ve earned it!

As financial advisors, we fully support the occasional treat. If you don’t know what to do or want some help, we would love to help you maximize what you do with your bonus, so schedule a meeting today. 

Northern Lights Advisors is a fiduciary, fee-only Registered Investment Advisor (RIA) firm based in Seattle, Washington. The information in this article is not intended as tax, accounting, or legal advice. Read the full disclosure here.